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[Jeshinta]

Global:

• China‘s growth re-accelerates in the second half after a first half slowdown to just above 8%.
• Downside risks: an oil price spike; a euro-area flare up; the US end-2012 fiscal cliff effect; a China investment slump.
• Upside risks: US consumers shrug off post-crisis blues, releasing pent-up demand; oil prices drop; euro tensions ease further.

U.S.

• Healthier labor market will continue supporting a revival of pent-up consumer demand in 2012.
• Look for the FOMC to maintain its current policy for now, but to respond quickly if downside risks intensify.
• Policymakers won’t act until after the election to avert the effects of severe fiscal tightening scheduled to begin in 2013.

Europe

• Look for the European Central Bank to cut the refinance rate to 0.50% in July with risks skewed towards less and later.
• Assume the euro zone crisis will escalate and expect a new round of QE.

Asia

• Reconstruction is set to spur Japanese growth in the first half of 2012 even with slowing overseas economies.



Source: Forbes

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[Jeshinta]

The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that:

• The net short euro position increased to 174k contracts on May 15th from the previous week’s total of 107k contracts. This is the highest level on record beating the Jan.23 level (171.3k contracts).




• The net short yen position decreased to 34.3k contracts after the previous number 41k contracts. Yen positions keep improving for a fifth consecutive week.





• The net long pound position declined slightly to 25.0k contracts following the previous total of 25.3k contracts. Pound positions reached its highest level on May 3 (30.8k contracts)




• The net short Swiss franc position fell sharply to 26.6k contracts following a total of 16.4k contracts.




It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.

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[Jeshinta]

Weekly GBP/USD

Last week sterling experienced a big slump versus its US counterpart. The pair GBP/USD tested the levels below weekly Ichimoku Cloud, but then ultimately closed the week right at Senkou Span A. The new trading week was opened with a gap lower – the bulls are trying to close it, but the bearish Cloud is acting as resistance.

The prices breached support of the Turning line (2), so they are currently helped by the Standard line (1). Kijun-sen is moving horizontally and pointing at sideways trend – note that it may be in a rather broad range with the recent developments hinting at the fact that it may take place below the Cloud. Kumo is thin (3), so neither bulls, nor bears are really sure in themselves. All in all, the technical picture looks more negative than positive (GBP/USD returned below 200-week MA) and British currency is vulnerable for another leg lower in case Kijun-sen is breached.



Chart. Weekly GBP/USD


Daily GBP/USD

On the daily chart pound also breached important support levels – Kijun-sen (1), the support line connecting the minimums of January 13, March 12 and April 16 and the Ichimoku Cloud to consolidate below the latter. Kumo significantly narrowed in comparison to what we saw a week ago (3). The Turning line (2) dived below the Standard one (1) forming weak, but “dead cross”.

We don’t think that pound will be able to return above psychological level of $1.6000 in the coming weeks as it seems that the pair has topped on April 30. We expect sterling to trade this week between $1.5780 and $1.5950/6000 showing a kind of consolidative recovery ahead of further declines.



Chart. Daily GBP/USD

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[Jeshinta]

According to analysts at Fidelity Worldwide Investment, Greece is certain to leave the euro zone, but its exit is unlikely to collapse the whole system.

Specialists forecast Spain to ask for assistance in the recapitalisation of its banks from both the ECB and the IMF in the coming months, but then the situation is expected to improve. In their view, Spain and Italy have all the chances to avoid expulsion, despite the fact that the austerity programs in these countries have been losing support over the last few months.

The Greece’s cautionary example may illustrate the importance of the austerity measures and the probable consequences of non-cooperation with the EU. Analysts are convinced that Europe will never find a way out from crisis without a tight collaboration and political stability.

Analysts recommend investors to focus on capital preservation. The best strategy is not to put priority on income, but to invest in low volatility instruments.

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[Jeshinta]

The Finance Ministry reported on Friday the Spain’s 2011 budget deficit could be revised to 8.9% of GDP from initial 8.5% after four of its 17 regions overshot their expected budgets. However, the Ministry still expects to meet the target of 5.3% for 2012 budget deficit. Spain’s authorities forecast the Spanish GDP to shrink by 0.3% in Q2 2012. Recession in Spain, therefore, continues for the third consecutive quarter (in Q4 and Q1 economy also contracted by 0.3%).

These days the country is on a thin ice: the indebtedness is growing aggressively and the GDP is slowing down, leaving the euro zone’s economy under the threat. All eyes on the EU leaders: will they manage to balance austerity with growth?

French President Francois Hollande said on Saturday he would make proposals for Eurobonds at an upcoming European summit in Brussels on May 23. German Chancellor Angela Merkel is opposed to euro zone bonds in a short-term prospect. Hollande, however, is determined to persuade Berlin to lift its veto on issuing common bonds in order to get instruments to stimulate growth in the region.



Photo: AP

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[Jeshinta]

Analysts at Danske Bank note that after setting minimum at 0.7950 on May 16 European currency has shown 3 days of gains versus British pound.

However, the specialists claim that though both the UK and the euro area face hard times, the Britain’s economic prospects are better. Danske underlines that the Bank of England has stopped its bond purchases at the moment, while worsening conditions in the euro zone would prompt the ECB to ease further.

According to the bank, EUR/GBP will return below psychologically important level of 0.80. The pair will trade at 0.79 in a month and 0.78 in 3 months.



Chart. Daily GBP/USD

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[Jeshinta]

The common currency resumed a bullish correction vs. the greenback on Monday. The G8 meeting, held on May 18-19, didn’t give any clear answers, but the leaders expressed hope that Greece manages to stay in the euro zone. The G8 countries also stressed that their "imperative is to promote growth and jobs", giving a hint they are turning away from austerity.

Growth is expected to be the main topic of the EU meeting on Wednesday (May 23), where French President Francois Hollande is expected to call for Eurobonds. According to analysts, focus on growth means the higher ECB involvement, “dovish” monetary policy and a weaker euro.

The uncertainty in Europe persists: investors remain concerned about the possible consequences of the so-called “Grexit” (Greece may be forced to leave the euro zone if the anti-austerity party wins the elections in June) and about the situation in Spain’s banking sector (the country is expected to ask for bailout soon, 10-year bond yields increased to 6.29%).

Bulls dominate the market on Monday; however, most analysts believe it's a short-time correction. EUR/USD still trades far below the 55-, 100- and 200-days MAs. MACD stays on the negative territory and below its signal line, giving sell-signals. The pair trades far below the daily Ichimoku Cloud.

The bullish trend may strengthen if the pair manages to fix above the strong $1.2812 resistance (today’s maximum). Further resistance lies at $1.2845, $1.2880, $1.2910, $1.2930, $1.2950, $1.2970 and $1.3010, while support – at $1.2750, $1.2710, $1.2680, $1.2665 (May 17 minimum), $1.2640 (May 18 minimum).



Chart. Daily EUR/USD

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[Jeshinta]

EUR/USD shows a two-day advance ahead of the EU summit on Wednesday, which is expected to show who stands where among the European leaders. German Chancellor Angela Merkel said yesterday that good cooperation “doesn’t exclude differing positions” referring to Francois Hollande’s intention to push through the idea of Eurobonds.

US session was positive with S&P 500 rising by 1.6%. Asian stocks added 1.2% today (MSCI Asia Pacific Index). Risk sentiment managed to improve, though the markets lack momentum. Commodity currencies got slightly higher versus the greenback. Demand for the New Zealand dollar and for the Aussie was supported as Asian stocks extended a global rally.

US dollar itself gained a bit against Japanese yen and Swiss franc. On Wednesday the markets will be eyeing the Bank of Japan’s meeting. The benchmark rate is seen unchanged at 0.10% level, though the central bank may be forced to do more easing.

Events to watch:

• Great Britain: Consumer Price Index (CPI) in April is forecasted to grow by 3.1% (a decline in comparison with a 3.5% growth in March, but still much higher, than a 2% BoE target). It’s possible, however, that the rate falls to 3% (the lowest since February 2010) saving the BoE Governor Sir Mervyn King from issuing the inflation letter (the letter is only required if the inflation is below 1% or above 3% and is written to explain why inflation has overshot the target). Public sector net borrowing in April may decline to minus 5.4B vs. 15.9B in March.

• U.S.: Annualized number of existing home sales – the main gauge of housing market conditions – may increase from 4.48M in March to 4.65M in April supporting the idea of the nation’s economic rebound. The labor market is America’s weakest spot and many investors go the US nowadays only because it’s better than Europe.

• Europe: Consumer confidence in the euro area will likely remain low. Don’t wait for any surprises here. Spain will sell 3- and 6-month bills.

• The OECD (Organization of Economic Cooperation and Development) will release its global growth forecast.

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[Jeshinta]

Analysts at RBS claim EUR/USD may rebound towards $1.2963 (50% Fibonacci retracement of the decline from May 1 maximum to May 18 minimum. The pair’s currently consolidating in the $1.2790 area (23.6% Fibonacci retracement).

Though these levels may be considered as a good entry for shorts, note that euro’s got some support on H4 chart (trend line started to form, MACD and RSI are positive). In addition, one may see a “bullish engulfing” candle on the daily chart. On the upside, resistance levels for the single currency lie $1.2805 (H4 55 MA), $1.2825 (yesterday’s maximum) and $1.2869 (May 15 maximum).

The general sentiment, however, remains bearish as long as EUR/USD trades below the psychological level of $1.3000, so euro’s still extremely vulnerable on the downside. Support is seen at $1.2780 and $1.2720 (H4 chart). The pair’s decline will accelerate if $1.2624 (2012 minimum) is breached with $1.1875 (June 2010 minimum) getting in focus.



Chart. H4 EUR/USD




Chart. Daily EUR/USD

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[Jeshinta]

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2700, $1.2750, $1.2790, $1.2800, $1.2825 and $1.2850;
USD/JPY: 79.25, 79.50 and 80.00;
GBP/USD: $1.5800 and $1.5900;
EUR/GBP: 0.7960 and 0.8075;
AUD/USD: $0.9800, $0.9930 and $1.0000;
USD/CAD: 1.0000 and 1.0200.



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[Jeshinta]

This week the Canadian dollar strengthens against its U.S. counterpart due to the slightly improved risk sentiment. On the H4 chart, however, we see USD/CAD went up today after Fitch downgraded Japan’s long term rating and yields on Spanish bills increased.

The cross has been trading in a bullish channel since early May, so the loonie’s growth is likely to be a correction. On the H4 chart USD/CAD is trading above the 55, 100 and 200 upward MAs. Strong support for the pair lies at C$1.0145 (23.6% Fibonacci retracement of the growth from April 27 minimum to May 21 maximum and the support of the upward trend line).

On the H4 chart, however, MACD indicator stays in the positive territory, but below the signal line, giving a sell-signal.

Resistance for the pair lies at C$1.0200, C$1.0225, C$1.0245 (local maximum), C$1.0275 and C$1.0300, while support – at C$1.0165, C$1.0130, C$1.0090, C$1.0050, C$1.0025 and C$1.0000.



Chart. Daily USD/CAD

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[Jeshinta]

On Tuesday GBP/USD resumed a bullish trend after the Britain’s CPI data release and the IMF “dovish” comments.

Annualized April CPI fell to 3.0% compared with the previous reading 3.5% and a 3.1% forecast. According to analysts, if the inflation declines further in May, the Bank of England will get freedom to add monetary stimulus to support the economy.

According to the IMF, the Bank of England needs to inject more stimulus into the U.K. economy (through more bond purchases or interest rates cuts) as risks from the euro zone may underpin Britain’s growth.

IHS: While it will take more than one month of improved inflation data to ease the Bank of England’s recently heightened concerns over its stickiness, April’s sharp drop nevertheless facilitates further QE by the central bank if the economy continues to struggle for growth or is seriously affected by events in Greece.

Tomorrow minutes of the May 9-10 MPC meeting will be released, showing how policy makers voted. This month the bond-purchase program remained unchanged at 325 billion pounds. On Thursday Britain’s revised GDP in is expected to confirm that the economy shrank 0.2% in Q4 and, therefore, is in a technical recession.

Lackluster economic data, “dovish” BoE comments and increasing concerns on a new QE are expected to weigh on the British currency.



Chart. Great Britain's CPI
Source: Forexstreet




Chart. Daily GBP/USD

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[Jeshinta]

The Bank of Japan has chosen not to deliver more monetary stimulus this month. The central bank kept benchmark rate unchanged at 0.1% and announced no additional bond purchases. The lack of easing made yen to strengthen versus all of its major peers. In addition, Japan’s trading deficit narrowed from 0.62T in March to 0.48T in April – another driver for Japanese currency.

Risk sentiment today was also hurt by the reports of former Greece Prime Minister Lucas Papademos saying that preparations for the country's exit from the euro zone are being considered. Although Papademos regards such move as unlikely, the risk, according to him, seems real.

Asian stocks lost 1.5% (MSCI Asia Pacific Index). AUD/USD hit the minimal level since 2011 sliding to 0.9741. EUR/USD is consolidating above 2012 minimum of $1.2624.

Also watch today:

• Great Britain: MPC meeting minutes. According to the forecasts, the MPC officials have voted unanimously to keep the monetary policy unchanged. Retail sales in April are forecasted to decline by 0.5% vs. a 1.8% growth in March – that would be a very bad sign indicating that the condition of the recessed UK economy aren’t improving at all.

• Europe: Leaders of the EU 27 member states assemble in Brussels for a crisis meeting. New French President François Hollande will try to push the currency union from austerity to growth promotion and make Germany agree to the euro bonds – debt issued for the euro zone as a whole. Analysts at Westpac say that the outcome of the meeting will hardly stimulate markets.

• Canada: Core retail sales in March may grow by 0.6% compared with a 0.5% increase in February. The nation’s economy for now seems stable enough.

• U.S.: New home sales are also expected to increase to 336K in April vs. 328K in March.

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[Jeshinta]

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2650, $1.2725, $1.2730, $1.2750, $1.2850 and $1.2870;
USD/JPY: 78.75, 79.00, 79.75, 79.85, 80.00 and 80.30;
EUR/GBP: 0.8040 and 0.8100;
USD/CHF: 0.9300 and 0.9400;
AUD/USD: $0.9900 and $0.9950;
USD/CAD: 1.0120 and 1.0140.



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[Jeshinta]

According to analysts at JPMorgan Chase, the greenback is likely to strengthen versus its major counterparts as a “safe-haven” against the backdrop of possible Greek exit from the euro zone. Analysts expect the economic slump in China and in the U.S. to weaken commodity currencies as the prices will fall. Japanese yen is the only currency that is expected to appreciate against the dollar.

Specialists sharply lowered their forecasts for EUR/USD to $1.22 in Q2 and to $1.24 by the end of 2012. USD/CAD is forecasted to reach C$1.04 by mid-year AUD/USD may fall to $0.96, while NZD/USD – to $0.73. USD/JPY, however, may weaken to 78.00 yen in Q2.

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[Jeshinta]

According to Bank of America, the common currency may reach its highest level against the Japanse yen in almost three weeks.

Analysts expect EUR/JPY to strengthen in a short term to 105.80 yen (50% Fibonacci retracement of a decline from March 21 maximum to May 18 minimum). In their view, the euro is looking oversold (14-day RSI is close to 30, signaling the downtrend may reverse) Since the end of March the euro has declined 8% versus the Japanese currency.



Chart. Daily EUR/JPY

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[Jeshinta]

The Bank of Japan has chosen not to deliver more monetary stimulus this month. The central bank kept benchmark rate unchanged at 0.1% and announced no additional bond purchases (the size of asset-purchase fund remained at 40 trillion yen ($503 billion).

According to the BOJ, Japanese economy is vulnerable due to the strong uncertainty over the global economic prospects and concerns about the euro area. Japanese monetary authorities assure the markets that they are ready to act if markets become destabilized and yen makes a new spike.

The lack of easing made yen to strengthen versus all of its major peers. In addition, Japan’s trading deficit narrowed from 0.62T in March to 0.48T in April – another driver for Japanese currency.

Yesterday Fitch cut the nation’s long-term foreign and local currency issuer default ratings to A+ with negative outlooks citing high rising public debt ratios. However, the downgrade didn’t have much impact on USD/JPY as most Japanese government bonds (JGB) are domestically owned.

Analysts see the next move to more easing in July after the central bank releases its economic forecasts. NLI Research Institute points out that “Japan is likely finding it more difficult than before to intervene in the currency market given international pressure, so if the yen spikes to around 77 to the dollar, the BOJ may act first through monetary policy to weaken yen.”

The pair USD/JPY is trading within gently sloping downtrend since the end of March.



Chart. Daily USD/JPY

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[Jeshinta]

EUR: Weaker economic data expected later this week will limit EUR/USD upside potential from current levels.

GBP: The sharper than expected fall in inflation in April may have lowered a potential barrier to more QE. GBP gains will be capped from here. The fair value for GBP/USD is at $1.54, so the pair may extend decline. A dovish set of BoE minutes is likely to support the ongoing squeeze higher in EUR/GBP.

JPY: Japanese policy makers are expressing increased concern over JPY strength. Intervention risk will increase, if USD/JPY approaches 78 yen level.

CHF: Swiss consumer confidence rebounded to the maximal level in a year, adding to the view that the economy is stabilizing. Renewed Euro zone fears are likely to increase demand for CHF amid safe haven flows, but the SNB stands ready to act.

CAD: Core and headline y/y CPI for April increased and March manufacturing and wholesale sales improved. But there was foreign net selling of Canadian securities in March and external headwinds and positioning adjustments weighed on the CAD.

AUD: Aussie has price in a lot of negative developments (lower commodity prices, weaker equities, narrower yield advantage, and domestic political uncertainty). At the same time, uncertainty in Europe suggests risks are still skewed to the downside.

NZD: New Zealand’s government to deliver a credible budget on Thursday. Political stability much stronger than Australia. Recovery frustratingly slow, but looks somewhat oversold compared to the AUD.



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[Jeshinta]

British pound is slapped by very poor retail sales data: the index contracted in April by 2.3% (the biggest decline since 2008) after adding 2% in March.

Also note that the MPC released its May meeting minutes. The essentials are:

BoE is prepared for another round of QE, but doesn’t want to hurry as inflation will remain above the target 2% level in the medium term.
David Miles dissented from the majority opinion and voted for more QE (25-billion-pound increase).
Decision to keep rates unchanged at 0.50%, as expected, was unanimous.
The MPC would continue to monitor the outlook each month and further monetary stimulus could be added if the outlook warranted it.

GBP/USD hit $1.5673, the minimal level since the mid-March after breaching 200-day MA yesterday. Technical analysts at Commerzbank claim that the next target for sterling on the downside lies at $1.5599 (March minimum).



Chart. Daily GBP/USD

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[Jeshinta]

AUD/CAD keeps trading in a downward channel since January. Last week a bullish correction followed the break below parity, but the bulls were unable to reverse the long-term downtrend.
However, analysts at RBS see the potential for the pair’s upward reversal. The specialists underline that the pattern resembling such reversal model as “doji” was formed last week (see the weekly chart). In their view, the value of this observation increases as the market is trading in oversold conditions (14-week RSI is close to 30).

According to RBS, one may go long on AUD/CAD at $1.0060. The bank recommends increasing positions if Aussie overcomes 1.0112 (May 17 maximum). Bullish targets lie at 1.0430 onto 1.0557, while stops may be places around 0.9890.

In our view, the picture on the daily and weekly Ichimoku charts is still too negative. We advise you to bear this trade in mind. If the pair rebounds in the 0.9925/00 area (and support looks solid enough), don’t hurry and watch for the parity level. If the rate overcomes 1.0000, get ready to follow the lead of RBS.

Support levels:
- 0.9943 (38.2% Fibonacci retracement of a 2010-2011 growth);
- 0.9925 (support of a channel);
- 0.9913 (2009 maximum, 100% Fibonacci retracement of a 2009 growth).

Resistance levels:
- 0.9977 (May 15 minimum);
- 1.0175 (resistance of a channel);
- 1.0000 (parity);
- 1.0207 (double top in 2010);
- 1.0430 (100-day MA, 123.6% Fibonacci retracement).



Chart. Daily AUD/CAD

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