0:09 Chinese economic data;
1:38 Eurozone data and Italy’s downgrade;
2:37 Japanese vote on new BoJ Governor;
3:48 CHART – USDJPY analysis.
Forex research: Global markets daily
[B]UK growth and German inflation in focus this morning[/B]
Today’s UK opening call provides an update on:
• S&P closes within 9 points of all time highs, while Dow hits them for a fifth day;
• BoJ Governor elect hints at aggressive easing before April meeting;
• NIESR GDP estimate provides insight into first quarter performance;
• Expectations low ahead of UK manufacturing and industrial output data;
• German inflation data could prompt speculation of future ECB rate cut.
After a slow start to the week, European stock index futures are pointing to a slightly lower open after the Dow and S&P in the US posted gains for a seventh consecutive session, with the latter now within 9 points of all time highs.
Over in Asia, the Nikkei pulled back slightly, while the yen extended its losses after Haruhiko Kuroda, who is expected to be confirmed as new BoJ Governor this week, hinted at easing monetary policy before the next meeting in April. All this talk of aggressive action has been building in the markets for weeks now, to the point where expectations are so high it’s going to be difficult for the BoJ to live up to them. We’re going to need to see something special at the next meeting, such as bringing the open ended asset purchases forward to the first half of this year just to keep the Nikkei ticking higher and the yen pushing lower.
The RICS house price balance fell back to -6% in January, due mainly to poor whether, however surveys have also shown that property professionals are actually more optimistic about property prices this year. This is quite a positive sign for the UK as it suggests that not only are banks coming round to the idea of lending, probably due to the funding for lending scheme, but also that people see the market improving and want in. Given the correlation between economic performance and property prices in the past, this can only be a good thing for the UK which is forecast to barely grow again this year.
We’ll get our first insight into how the UK has performed in the first two months of the year this morning, when the NIESR releases its GDP estimate for the period December - February. While this estimate is far from perfect, it could give an indication as to whether the country has grown or contracted so far this year, which is especially important after the UK contracted in the fourth quarter of last year, meaning it now faces a possible first ever triple dip recession.
Manufacturing and industrial production figures are expected to show a slight improvement in January, rising 0.1%. This still represents a drop of more than 1% in both compared to a year earlier, highlighting the difficulties facing both industries in the UK, where even the most optimistic people are expecting marginal growth this year.
There’s been a lot of speculation recently that the ECB are strongly considering cutting interest rates, after a strong euro pushed inflation back in line with its target of 2% or lower, with the figure expected to fall further in the months ahead. The release of Germany’s inflation figure for February this morning will only increase expectations of a rate cut if it’s released in line with forecasts at 1.5%. Jens Weidmann has openly opposed a cut until now due to inflation risks, however even he would find it difficult to fight a cut at future meetings with inflation falling at a rapid pace and well below target.
[B]EURUSD[/B]
Despite recent attempts to break above the descending trend line, the euro is continuing to edge lower against the dollar this morning. The pair did break back above 1.30 yesterday, however we’re likely to see this tested again today, with a break below here prompting a move back towards 1.29. Alternatively, we could see another attempt at a break above the descending trend line, with a daily close above here being quite bullish for the pair, with the next big resistance levels being 1.3060, 1.3125 and 1.3150.
[B]GBPUSD[/B]
Sterling is continuing to look quite weak against the dollar in the longer term, however a lack of a daily close below 1.49, despite numerous attempts in the last couple of days, suggests we may see a retracement before the next move lower. This was capped off with a doji candle yesterday, a reversal signal, which could form a morning star today if the pair closes higher than the opening price. This would be a very bullish signal and could prompt a move back towards 1.50, potentially even as far as 1.53.
[B]USDJPY[/B]
We’re seeing more yen weakness today, with the dollar rallying as high as 96.70 over night, hitting more than three and a half year highs. The pair is only looking like heading in one direction at the moment, with the next big resistance level being 97.60. Above here the next target will be 100.45. In the shorter term, we’re currently seeing resistance around 96.40 and could see further resistance around 96.75 and 97.0.
[B]EURGBP[/B]
The euro broke back above the long term descending trend line yesterday, before finding resistance this morning around 0.875. The next major resistance level comes just above here around 0.88, the 78.6% retracement of the move from July 2011 highs to July 2012 lows. This is also a previous level of support and resistance. A break above here should prompt a move towards 0.9082.
Ahead of the open we expect to see…
[B]Yen rallies as Democrats refuse to support Iwata nomination[/B]
Today’s US opening call provides an update on:
[ul]
[li]Kuroda receives back from opposition Democratic party, deputy nominee Iwata relying on fringe votes;
[/li][li]More shocking data out of the UK prompts talk of a triple dip recession;
[/li][li]German inflation falls to 1.5%;
[/li][li]Spanish debt auction a success.
[/li][/ul]
The focus has been on Japan this morning, after the Democratic Party revealed that they would not support the nomination of Kikuo Iwata as deputy governor of the BoJ.
As Shinzo Abe’s party don’t hold the majority in the upper chamber, they are reliant on opposition parties to support their nominations if they are to be passed, something that until this morning didn’t appear to be a problem.
While the Democrats have agreed to support the nominations of Kuroda and Nakaso, the lack of support for Iwata means Abe now has to rely on votes from the fringe parties, who are still expected to offer their support. The yen still rallied on the back of this as a vote against Iwata is seen as a vote against a more radical approach to reflating the economy, which would further weaken the yen.
More abysmal data out of the UK this morning has once again prompted talk of a triple dip recession. Manufacturing and industrial production figures have not been a strong point for the UK for quite a while now but these have been especially poor. Both fell more than 1% compared to a month earlier, despite expectations of a small rise.
Inflation in Germany was 1.5% in February, dropping another 0.2% compared to January, and taking the total fall since December to 0.6%. This should go some way to easing concerns in Germany about the inflation risk associated with an ECB rate cut, which surely increases the probability that we’ll see one in the coming months.
Spain successfully auctioned €5.83 billion of short term debt this morning with much lower yields than at a similar auction a month earlier. There were concerns following the Italian elections last month that investors may boycott Spanish and Italian bonds, however this was clearly just a knee jerk reaction.
Ahead of the open we expect to see…
0:09 UK manufacturing data released this morning;
0:27 UK triple dip recession
1:54 Japanese Democratic Party’s decision not to support Iwata nomination.
Forex research: Global markets daily
[B]Appetite for Italian debt tested following Fitch downgrade[/B]
Today’s UK opening call provides an update on:
• Dow hits all time highs and extends winning run to eight days;
• Eurozone industrial production contracts at a slower rate in February;
• Appetite for Italian debt tested at an auction today following the Fitch downgrade;
• US retail sales watched closely for signs that new taxes and the sequester hit spending.
The Dow extended its winning run yesterday, finishing marginally higher for an eighth session, while once again hitting new all time highs.
The FTSE is expected to open lower this morning after being one of the few indices to end the European session higher, on hopes of additional stimulus from the BoE next month. Another batch of woeful data out of the UK, this time in the form of manufacturing, industrial and GDP data (December - February), has all but convinced people that we’re back in recession and given the closer voting among the MPC recently, an additional £25 billion in asset purchases next month now looks nailed on.
The European session is going to be a little quieter in terms of economic data, with the main release this morning being the industrial production figure, which is expected to have fallen again in January compared to a month earlier, following a surprising jump in December. On a more positive note, this should bring the year on year figure down to -2.2%, the lowest since June last year, which at least suggests the euro area is making some progress even if it is very gradual.
Appetite for Italian debt will be tested at a bond auction this morning, when the country attempts to raise up to €7.25 billion. While the interest paid at today’s auction will undoubtedly be higher, following the inconclusive election last month and Fitch’s downgrade earlier this week, the existence of the OMT backstop will prevent yields rising too much, while demand for the bonds is expected to remain high.
US retail sales for February will be an interesting one to watch this afternoon. There have been concerns that the expiry of certain tax breaks on 1 January, in particular the payroll tax, together with the uncertainty surrounding the sequester may have impacted consumer spending at the start of the year, although so far we have seen little evidence of this. The data today is again expected to suggest that the impact has been minimal, at worst, with both retail sales and core retail sales rising 0.5%.
[B]EURUSD[/B]
We’ve seen some consolidation in this pair over the past couple of weeks, with it trading in a range between 1.2950 and 1.3150. This is likely to change in the coming days, given that the support level and the descending trend line now appears to have formed a descending triangle. This tends to be a continuation signal, with the pair breaking below the 1.2950 support level and heading lower. If this happens, the next support levels should come around 1.29, 1.2876 and 1.2850 (200 day SMA). If we see a break above, based on the size of the entry into the triangle, the target for the pair would be between 1.3350 and 1.34.
[B]GBPUSD[/B]
There has been a lot of downward pressure on this pair in the last few days, with sellers trying to push sterling below its 1.49 support level. A failure to do so may result in quite a bullish formation on the daily chart, as long as today’s candle closes above yesterday’s. This would create a bullish engulfing pattern, prompting a move higher, with the initial target being 1.50, a key psychological level. A break above here would suggest that we could see a move as high as 1.53, which was a major support level that the pair broke below last month.
[B]USDJPY[/B]
The yen has weakened significantly against the dollar in the last six months, and this looked set to continue after the pair broke through a major resistance level, 94.75, last week. What we’ve seen since over the past 24 hours though is the yen strengthen, which to me suggests we’re going to see that previous resistance level tested as a new area of support. This would act as confirmation of the original break and once again prompt a move higher with this weeks highs of 96.70 providing the next major resistance level.
[B]EURGBP[/B]
The euro has quickly turned bearish against the pound, despite breaking above the descending trend line only last week. The pair found resistance on Tuesday around 0.88, which I highlighted in yesterday’s morning analysis as a major resistance level. Yesterday’s doji candle suggests we could now see a reversal in the recent up trend, which would be made more bearish if today’s candle closes lower, resulting in an evening star formation. Initially, this should prompt a move back towards the descending trend line, testing it as a new level of support, which would act as confirmation of last weeks break. If this occurs, it would then probably be followed by another attempt to break above 0.88.
Ahead of the open we expect to see…
[B]Italy pays more following Fitch downgrade[/B]
Today’s US opening call provides an update on:
[ul]
[li]Eurozone industrial production falls less than expected compared to a year earlier;
[/li][li]Italy pays more for its debt following Fitch downgrade;
[/li][li]Germany pays less following warning from Weidmann;
[/li][li]Higher taxes and sequester impact on consumer spending tested as US retail sales figures released.
[/li][/ul]
The industrial production figures released out of the eurozone this morning were a bit of a mixed bag. While production in January fell more than expected when compared with December, the drop was actually smaller than had been forecast when compared with the same month a year earlier.
On top of that, previous figures were revised slightly higher, so while we’re still seeing volumes fall, they’re falling at a slower rate which is positive for the euro area and suggests things a starting to turn around.
The Italian debt auction this morning went largely as expected, with Italy being forced to play slightly higher yields on its three and 15-year bonds, while interest in the auction was respectable. Italy managed to raise close to the maximum target during the auction falling slightly short of its maximum target of €3.5 billion.
It was clear that Italy was going to have to pay more at this auction that they did previously, given the political uncertainty in the country since the elections last month and the recent downgrade by Fitch. At an auction of one-year debt on Tuesday they had to pay roughly a 20 basis point premium on the last auction to offset the additional concerns we’re seeing now, which is slightly more than what we saw today. All things considered I think this is going to be seen as a largely successful auction for Italy.
This was followed by an auction in Germany of two-year notes which highlighted a slight leaning towards risk aversion following Jens Weidmann’s comments yesterday. The warning from the head of the Bundesbank that the eurozone crisis is far from over clearly struck a chord with some investors, as interest paid on the notes fell to 0.06%, from 0.21% at an auction last month.
Next up we have US retail sales for February, which will be watched closely this afternoon. It will be interesting to see whether the expiry of certain tax breaks on 1 January, such as the payroll tax, and the uncertainty surrounding the sequester have impacted consumer spending at the start of the year. The data today is expected to suggest that the impact has been minimal, with both retail sales and core retail sales rising 0.5%.
Ahead of the open we expect to see…
0:08 Italian bond auction weighs on sentiment;
1:21 Slight improvement in industrial production;
2:21 Attention on US retail sales next;
3:11 CHART – EURUSD analysis
Forex research: Global markets daily
[B]Cypriot bailout top of the agenda at today’s EU summit[/B]
Today’s UK opening call will provide an update on:
• Cypriot bailout top of the agenda at the EU summit;
• Fourth quarter employment data to highlight further eurozone weakness;
• US weekly jobless claims to remain low after four week moving average hit March 2008 lows last week;
• US inflation data to be watched closely due to its impact on Fed policy.
The Dow extended its winning streak yesterday to nine straight session, after strong retail sales in February eased concerns over the impact of new taxes and the sequester on consumers in the US.
Cyprus will once again be the main topic of conversation at today’s EU summit, as European leaders try to come to some kind of deal on the country’s bailout. There are a few issues still standing in the way of a deal here, such as an unwillingness on Cyprus’ part to allow depositors to make losses, as this would affect people’s confidence in the banks and could prompt a bank run.
A deal today looks very unlikely, given how far they still are from an agreement, however any signs that a deal is close will be taken positively in the markets, due to the fact that Greece’s exposure to Cypriot debt could prompt a full blown return to the debt crisis if Cyprus defaults.
As we’ve already seen so far this week, it’s going to be pretty quiet in terms of economic data on Wednesday. Eurozone employment is expected to fall slightly again in the fourth quarter of last year, while Greece’s unemployment rate is expected to have surpassed 25% in the same period.
In the US this afternoon, we have the weekly jobless claims, which have improved significantly so far in 2013. The four week moving average has fallen quite a bit this year, reaching 348,750 last week, the lowest since March 2008, and is expected to remain low today with claims of around 350,000. This reduction in the number of people being laid off was reflected in the unemployment rate last week, which fell to 7.7% in February.
Following this is the release of the producer price index, which will be watched closely as a rise in inflation could potentially threaten the Fed’s asset buying, which to this point has contributed largely to the rally in stock markets which has seen the Dow hit all time highs and the S&P come within 20 points of the record.
[B]EURUSD[/B]
There was a lot of selling in this pair yesterday, which saw it break below 1.30, a big psychological level. As I mentioned in my analysis yesterday, the pair is currently trading in a descending triangle and despite trading below here at times, closed back above the 1.2950 support. This suggests that in the next day or so we should either see a move back towards to the descending trend line, around 1.3030, or another attempt at a break below. If we see the latter, the pair should find support around 1.29, 1.2875 (50 fib level) and 1.2860 (200 day SMA).
[B]GBPUSD[/B]
Sterling is trading higher again today, after finding support over the last week around 1.49, a major support level. We could now see the pound pare some of its recent losses, with the next big resistance level being 1.50, a key psychological level. If we see a break above here then we could see a move as high as 1.53 which was previously a major support level. Alternatively, if it finds resistance around 1.50, I expect to see further selling pressure, followed by another attempted break below 1.49, which in the longer term should prompt a move back towards 1.44.
[B]USDJPY[/B]
The dollar is strengthening against the yen again this morning, following a brief period of consolidation. The next target for the pair is going to be 97.6, a previous resistance level, however it should find resistance along the way around 97.0, which is a previous level of support and resistance. In the longer term I’m still bullish with 100.45 easily in sight, however if the pair finds strong resistance around 97.6, we could first see a long overdue pull back, especially if it comes before we see aggressive easing from the Bank of Japan, which the whole rally to this point has been predicated on.
Ahead of the open we expect to see…
[B]Irish exit from bailout program discussed at EU summit[/B]
Today’s US opening call provides an update on:
[ul]
[li]Ireland successfully auction 10-year bonds in a sign that they could exit the bailout program this year;
[/li][li]Irish exit from the bailout program to be discussed at the EU summit;
[/li][li]Cyprus bailout also on the EU summit agenda;
[/li][li]US weekly jobless claims up next.
[/li][/ul]
European stock indices are all trading higher early in the session, buoyed by the prospect of Ireland becoming the first country to exit the bailout program later this year.
Ireland completed its first auction of 10-year bonds yesterday, as it moved a step closer to exiting the bailout program, which has been viewed in the markets as the first time we’re seeing the positive side to austerity. This also marks a shift from austerity to growth for Ireland which gives hope to other countries currently in the program.
On top of that, we could now see the OMT’s tested for the first time towards the end of this year, with Ireland eager to take advantage of the lower yields. Given that they have already complied with one bailout program, the conditionality attached shouldn’t really be too severe.
The timing of the auction has been perfect as well, with the EU leaders now expected to discuss Irelands exit from the program at the summit today and tomorrow. If we get further details about this over the next couple of days we could see stock indices continue to push higher, with the FTSE looking to break back above 6500 and through those five year highs.
We could also get some more details on Cyprus and its bailout, which is also due to be discussed at the summit. I think a bailout program is fully priced into the markets at the moment but I think investors will be looking for some reassurance on the matter, given Greece’s exposure to the country and the potential for a run on the banks in Cyprus if lenders attempt to force losses on depositors.
This afternoon we have a couple of key pieces of data out of the US, the first being the weekly jobless claims which have seen a substantial improvement so far this year. New claims of 350,000 are expected here however given that we’ve seen forecasts easily beaten in the last couple of weeks, I wouldn’t be surprised to see a repeat today.
We also have some inflation data released in the US, with the PPI figure for February expected to show prices rose by 1.7% compared to a year earlier, down from 1.8% in January. This should help ease concerns among those currently involved in the rally in the stock markets that the Fed will scale back on its asset purchases, or lift interest rates, in the near future.
[B]Sterling makes aggressive move higher[/B]
Sterling has been in a downtrend for a long time, however the bearish move has recently lost momentum around 1.49, a major support level.
Since then it has started to pare some of these losses, but quickly found resistance around 1.50, a big psychological level. As I discussed in my morning analysis, 1.50 is a big level for the pair, with a break above suggesting we’ll see a move back towards 1.53, and a failure to break potentially being the catalyst for a move below 1.49 and back towards 1.44.
Well today we’re seeing the 1.50 challenged and a daily close above could be a sign of the move back towards 1.53. A closer look at the hourly chart suggests the break is legitimate, with the last candle breaking aggressively above the bollinger band and the parabolic pointing to a change in momentum (although a third dot is needed to confirm this).
[B]Aussie facing major resistance[/B]
The aussie has made some strong gains against the dollar in the last couple of weeks, however the rally may soon be coming to an end.
The pair is approaching a key area of resistance between 1.0390 and 1.0415. Aussie gains are currently being capped by the 100 month SMA, which has provided significant resistance following a strong rally today. This has also previously been a big support level.
If the pair does push beyond this it should find further resistance around 1.0413, which is a previous level of support as well as the 61.8% retracement of the move from this year’s highs to lows.
Ahead of the open we expect to see…
0:09 EU summit: Ireland to exit bailout program?
1:22 EU summit: Cypriot bailout
2:05 US weekly jobless claims
Forex research: Global markets daily
[B]EU Summit and eurozone inflation in focus this morning[/B]
Today’s UK opening call provides an update on:
• Fewer layoffs in the US push S&P close to all time highs, Dow’s run extended to 10 sessions;
• Day two of the EU summit sees more discussions on Ireland’s exit from the bailout program;
• MPC member Spencer Dale due to speak at the Asian Business Network this morning;
• Eurozone inflation figure could prompt more calls for a rate cut from the ECB.
The S&P came within two points of its all time highest close yesterday, while the Dow hit new highs once again and extended its winning streak to ten consecutive sessions.
Investor sentiment was given a boost yesterday when the US weekly jobless claims came in below expectations for a third consecutive week, bringing the four week moving average down to its lowest level in five years. A combination of fewer layoffs and more hiring, as seen by the better non-farm payrolls on Friday, brought the unemployment rate down from 7.9% in January to 7.7% in February. No wonder investors are starting to get a little carried away with this. The only problem is we now have an improved outlook for the economy on top of large Fed stimulus, which is going to be a huge test to just how much more we can inflate this equity bubble before it inevitably blows.
The EU summit will once again be the main event today, with EU leaders expected to discuss a possible exit from the bailout program later this year for Ireland, after it successfully auction off 10-year debt on Wednesday. Cyprus will also be on the agenda, however the terms of this bailout will probably be discussed more so at the eurogroup meeting, as confirmed by eurogroup President Jeroen Dijsselbloem on Wednesday, which also takes place today.
As always with these meetings, we can expected heightened volatility throughout the day, as details surrounding both the Irish and Cypriot bailouts are leaked out. Taking a look at European stock index futures this morning, it looks like investors are once again positive about these meetings and are expecting some good news at the end, whether it be confirmation of Ireland’s exit from the program or a final agreement on the details of a Cyprus bailout.
MPC member Spencer Dale will speak at 11.00 at the Asian Business Network, and will undoubtedly received questions on the current stance at the BoE on monetary policy, given that the voting at February’s meeting was very close, with Sir Mervyn King one of those voting in favour of additional asset purchases. The voting at the meeting in March is expected to have been even closer so any details Dale can give should create some movement in the markets, especially the sterling currency pairs.
It’s going to be another quiet day in terms of economic data out of Europe, with the eurozone inflation figure being easily the most closely watched release. With the ECB now clearly split on whether it should cut interest rates (voting at the last meeting was not unanimous), today’s inflation figure could be what swings the vote in favour of a 25 basis point reduction.
One of the concerns at the ECB is the inflation risk of a cut in the medium term, however if inflation falls to 1.8% in the euro area as expected, with Germany’s now at 1.5%, the risks suddenly don’t outweigh the benefits. That by no way means a rate cut at the next meeting would be guaranteed, however it would probably be much more heavily debated and would certainly increase the chances of a cut. As a result, a lower inflation figure today could see the euro weaken across the board.
[B]EURUSD[/B]
The euro is trading above the descending triangle this morning after spending most of yesterday threatening to break below it. As I mentioned in Wednesday’s analysis, the descending triangle tends to be a continuation pattern, however we can sometimes see breaks the other way, which it looks like we may see today. If the pair closes above the triangle, we should see it target 1.3370 in the coming weeks, based on the size of the entry into the triangle. In the shorter term, the pair is currently finding resistance around 1.3030 and a continued move higher should see it find further resistance around 1.3064, 1.3130 and 1.3160.
[B]GBPUSD[/B]
Sterling made some pretty substantial gains on Thursday, after breaking above 1.50, which as I mentioned yesterday is a major level for the pair. The next big target for me is 1.53, which we should see tested as a new level of resistance. This was previously a major support level, so confirmation of the original break here would be quite bearish. A look at the weekly chart would support the bullish view in the shorter term, with the last two candles forming a bullish engulfing pattern. If this weeks candle closes above last weeks opening price, 1.5040, then a move to 1.53 looks highly likely to me.
[B]USDJPY[/B]
This pair has entered into a period of consolidation again, having moved very little over the past few days. There’s been a lot of movement in the pair so far based purely on speculation of future monetary easing from the Bank of Japan, while very little has actually been done. I think this is now a case of traders sitting back and waiting for action, which could come shortly after Kuroda is appointed BoJ Governor. Once this happens, I think we’ll see the pair continue to push higher, towards 97.6, potentially even breaking straight through here and targeting 100.45. In the short term, we’ll probably see further consolidation.
[B]EURGBP[/B]
The pound made up some lost ground against most currencies yesterday, with the euro being one of them. The pair tumbled after breaking back below the long term descending trend line. This morning it has found support around 0.86, which has been a key level of support over the last month. If we see a break below here, the pair should find further support around 0.8575, followed by 0.85. Alternatively, if this holds as a support level again, I expect to see another attempt to break above 0.88, which has proven to be a major resistance level recently.
Ahead of the open we expect to see…
[B]ECB rate cut eyed as inflation falls to 1.8% in February[/B]
Today’s US opening call provides an update on:
[ul]
[li]Europe mixed after the FTSE and DAX hit five-year highs the previous day;
[/li][li]EU summit and eurogroup meeting taking place today, Cypiot bailout to be discussed;
[/li][li]Eurozone inflation falls to 1.8% in February, ECB rate cut eyed;
[/li][li]US inflation facing sharp rise, Fed QE3 program under threat.
[/li][/ul]
It’s been a quiet start to the end of the week, with a light economic calendar and some big meetings today pushing traders to the sidelines.
European indices are pretty mixed at this stage, a day after the FTSE and DAX hit new five year highs, while US futures are pointing to a slightly lower open. The dollar is continuing to slide against the euro and the pound, following a strong run, while against the yen we’re continuing to see consolidation ahead of what is bound to be a big move higher in the coming weeks.
We have some major meetings in Europe today, starting with the EU summit, where we’re expecting a number of issues to be discussed including Ireland’s exit from the bailout program, Cyprus’ entry into it and the Italian political situation. Yesterday we saw a slight easing agreed on budget flexibility, however the lack of reaction to this highlighted how little an impact it’s seen as having, with bolder measures needed in order to stimulate growth in the region.
A bailout for Cyprus is expected to be discussed at both the EU summit and the eurogroup meeting, however no deal is expected quite yet, with a few details still needing to be ironed out. A deal is only a few weeks away though which will provide additional relief to the markets given the potential for negative contagion once again should the country default.
Inflation in the eurozone fell to 1.8% in February, marking a drop of 0.2% from a month before, and increasing the chances of an ECB rate cut in the coming months. Inflation risk is always a major concern of the ECB, with its primary focus being on price stability, however given the rate of decline in the CPI figure, there’s now a real risk of deflation, making a rate cut all the more likely in the coming months.
US inflation will be watched just as closely today, with a rise to 1.9% expected, from January’s 1.6%. This could be seen as a threat to the Fed’s asset buying program in the short term, while a few months of these kinds of rises would also bring the ultra low interest rates into question.
[B]Signs of a reversal for GBP/CAD yet fundamentals bring about questions[/B]
Sterling has been trading higher for three days against the Canadian dollar, in a clear rejection of the support level found around 1.525. The previous level of 1.54 has been highlighted as a potential reversal level (here), however we have since pushed to the outer boundary of the long term sideways channel of the pair and signs point to a move back towards the upside.
The sharp downward channel of the pair have been consistent with the gradual devaluation of sterling over the recent period. However, we have now touched and rejected a long term level of support in 1.525, with a subsequent push back to the 23.6 Fibonacci retracement (1.547) today.
The weekly chart below shows that each time we have seen a push back above -100 or below 100 in the CCi indicator, it has provided significant movement for the pair. Subsequently, should we see confirmation of this move by seeing the stochastic cross and CCi push back above -100, it is likely we will see market sentiment turn more bullish.
[B]Aussie swissy look to push back to the downside after rejection of key resistance[/B]
The empire state manufacturing index and industrial production figures will also be watched closely this afternoon, after both surprised last month, with the former ending six months of negative figures in February with a strong figure of 10. Industrial production is expected to have increased by 0.4% in February, following the surprising drop in January.
Aussie swissy is trading lower today after yesterday’s rejection of the upper boundary of a sideways channel; respected for approximately six months. Subsequently the following days will bring into question whether there will be further pressure upon resistance or whether we will see a confirmation of this reversal and push down towards 0.9435.
The pair have been trading within a 450 pip range for a significant period of time and subsequently we would expect to see a considerable shift in emphasis for the pair to break out either side. Looking at the daily indicators, both the RSI and stochastic have been within the overbought region and are pointing downwards in a bearish position. Furthermore, the CCi indicator has just broken back below the 100 mark which is often seen as a bearish signal.
The current level coincides with the 200 day moving average, which has previously provided some fairly significant support and resistance (in purple). Therefore the ability to break past this would be very bearish for the pair. A confirmation of this reversal would likely see a push back towards 0.963 and subsequently 0.9435.
Ahead of the open we expect to see…
0:09 Big economic releases on Friday;
1:26 EU summit and the eurogroup meeting;
2:45 Italy’s attempts to form a stable government;
3:33 CHART – GBPUSD analysis
Forex research: Global markets daily
[B]Stocks plummet on bizarre decision to tax Cypriot savers[/B]
Today’s UK opening call provides an update on:
• Stocks and the euro plummet on decision to tax Cypriot savers;
• Decision risks a run on the banks in Spain and Greece;
• Levy politically motivated ahead of German elections;
• Cypriot politicians to vote on levy today.
Panic has returned to the markets on Monday, after European finance ministers voted in favour of a one off levy on depositors in Cypriot banks as part of a €10 billion bailout package.
Stock futures in Europe and the US are pointing to a 1.5-3% drop ahead of the open, while the euro has also taken a massive hit, trading almost two cents lower against the dollar compared to its closing price on Friday. This reaction clearly shows that despite talk of a one off levy last week, investors never really saw it as a realistic option, given the risk that it may now prompt a run on the banks in other countries that are considering a bailout, such as Spain.
Until now, European lenders have avoided imposing losses on savers as the risks associated with such a move were seen to be too high, which makes the decision on this occasion all the more bizarre. This decision appears to have been made more so with more political gains in mind than economic, and as a result I really think they’ve shot themselves in the foot.
It wasn’t that long ago that a €39.5 billion bailout for Spain’s banks was approved, which didn’t come with a similar tax on savers, so what’s changed? Well for one, we’re now in an election year in Germany and another bailout would do little to help Merkel’s CDU party in the polls. Passing on a chunk of the bailout to Cypriots will make yet another bailout a little more palatable for the German public, who have become very frustrated with having to bailout so many countries with German tax payer money.
All in all, the decision has been viewed as a poor one as it not only increases the risk of a run on the banks in countries such as Greece and Spain, it also threatens the renewed confidence that we’ve seen in the region since the start of the year. If the Cypriot government votes in favour of the levy on Monday, we could see stocks and the euro extend their losses, as risk aversion drives money back towards the safe haven dollar and bonds.
It’s going to be another quiet day in terms of economic data, with trade balance figures for Italy and the eurozone, and Irish retail sales the only major releases. Under the circumstances, I think these figures will be largely overlooked, with the Cypriot bailout continuing to weigh on sentiment throughout the day.
[B]EURUSD[/B]
The euro plummeted over the weekend, to start the week almost 200 pips below its Friday closing price. The pair was looking quite bullish on Friday, having closed above the descending trend line and the 61.8 fib level, however the decision to levy a one off tax on Cypriot savers (as explained above) has seen traders flee the euro in favour of the safe haven dollar. At the moment the pair has found support around 1.29, however we could see further selling throughout the day, which would see the 200 day SMA tested as a level of support, around 1.2860.
[B]GBPUSD[/B]
Sterling is tracking the euro lower this morning, forcing it back below 1.51 against the dollar following a strong rally towards the end of last week. We may see further losses in the pair today, however it still looks quite bullish in the short term, having formed a bullish engulfing pattern on the weekly chart. The next target will be 1.53, which was previously a major support level for the pair. If it finds resistance here then we should see a move back towards 1.49, with a break below here prompting a move back towards 1.44.
[B]USDJPY[/B]
The yen is one of the few currencies to have started the week strongly against the dollar, forcing it back towards 94.50, where it is currently finding support. If the pair breaks below here, the next level of support will come around 93.2, followed by 92.0. That being said, I think the pair will edge higher from here, with the target still being 97.60 and the next big resistance level being 96.70, the most recent highs.
[B]EURGBP[/B]
The euro opened lower against the pound this morning, breaking below the 61.8 fib level for the first time since the start of February, before finding strong support around 0.8520, from the 200 week SMA. The pair is currently finding resistance around 0.8575, the 61.8 fib level, however I expect to see it break back above here in the coming days, before targeting 0.88 again, where it has found resistance on two previous occasions. The next level of resistance should come around 0.86, followed by 0.8685.
Ahead of the open we expect to see…
[B]Traders lock in profits ahead of Cypriot vote[/B]
Today’s US opening call provides an update on:
[ul]
[li]Investor sentiment low as European creditors push for €6 billion levy on Cypriot savers;
[/li][li]Vote in parliament delayed as Anastasiades attempts to gather support to pass levy;
[/li][li]US futures lower as traders use the Cypriot story to lock in profits.
[/li][/ul]
European stock markets are under pressure this morning after it was announced over the weekend that Cypriot savers would contribute €6 billion to the country’s bailout.
In exchange for this one off levy, savers will be compensated with shares in the banks they are being forced to save, which under the circumstances is hardly going to be well received given the current price direction of those shares.
There is still a lot of uncertainty over when the vote on the levy will take place in parliament, with rumours this morning suggesting it could be as late as the end of the week. President Anastasiades is currently trying to gather enough support to pass the measures that would see Cypriot savers foot more than a third of the country’s bailout.
The whole thing is a farce that could have easily been avoided. It’s difficult to see the upside to this given damage being done to confidence in the region that has been slowly built up over the last six months. The only benefit comes at the political level, ahead of the German elections later this year.
US futures are pointing to a lower open of around 1% following the news over the weekend, however the drop seen here is only likely to be temporary. In such a major bull rally, similar to what we’re seeing at the moment in the US, traders will use this Cyprus story as an excuse to lock in profits and wait to buy on the dip.
[B]Cable bounce points towards potential impending resistance[/B]
Cable has finally seen some form of resistance to the downside momentum of 2013, with a rebound off the Fibonacci extension highlighted last week. However, we are now closely approaching a key level of resistance which could possibly act as a crucial indicator with respect to a further retracement or continued push to the downside.
The recent rebound off the 100.0 Fibonacci extension represents the strongest pullback in the pair for three months and this is making the move to the upside interesting as it is likely to provide an indication as to the strength of the bullish momentum in the pair.
The stochastic is pointing towards a further move to the upside, with 1.52 a crucial level to watch. This has previously acted as resistance and subsequently the expectation is that it has the potential to provide a similar level of resistance again. Markets are predominantly expecting further losses for the pair, however should we see a break above 1.52 it would provide further emphasis for a move towards 1.542-1.545.
Looking downwards, the next key level of support is found around 1.5076 and therefore the ability to break below this would likely signal a continuation of the downtrend and a push to 1.5.
Ahead of the open we expect to see…
James Hughes discusses the major points surrounding the Cypriot bailout and the controversial tax levy on savings. He also looks at the wider market reaction as currency and equity markets take a tumble.
Forex research: Global markets daily
[B]Europe edges lower ahead of Cypriot vote[/B]
Today’s UK opening call provides an update on:
• Europe lower on Cyprus levy vote;
• Fears of further bank runs eased;
• Cypriot government to vote on levy tonight;
• UK CPI and German ZEW economic sentiment figures up next.
European stock indices are expected to open slightly lower again on Tuesday, as investors remain risk averse ahead of the Cypriot vote in parliament this evening.
The initial panic that we saw when the European markets opened yesterday has eased off for now, given that we haven’t yet seen bank runs in any other eurozone countries in reaction to this. Spain, Italy and Greece will continue to be monitored closely for signs that depositors are looking to move their money elsewhere, which could spark a run on the banks.
Cypriot ministers are due to discuss the measures in parliament today, which will be followed by a vote on whether the levy will be applied at 18.00 local time. As it stands, deposits under €100,000 will be hit with a one-off tax at 6.7%, while those over the threshold will be taxed at 9.9%. Given that the vote has already had to be put back twice, due to the President being unable to guarantee enough votes to pass the levy through parliament, we’re likely to see these figures change throughout the day, something Cyprus’ creditors have given the thumbs up to as long as it still generates the required €5.8 billion.
The chances are, in order to get enough votes to pass the levy, President Nicos Anastasiades will be forced to lessen the burden on depositors with less that €100,000, and therefore increase the levy on those with more than €100,000 on deposit, something that will be very unpopular among the large number of Russians currently holding significant sums on deposit in Cyprus. We could therefore see a few more surprises yet, with the Russians looking at alternative scenarios that would not see them forfeit huge amounts in a one-off levy.
In the UK, the CPI inflation figure will be watched closely this morning, as any moves higher in the figure will only reduce that chances of seeing additional asset purchases at the next meeting on 4 April. Some MPC members are already concerned that the benefits of the program no longer outweigh the risks, so a rise in the inflation figure will hardly help ease these fears.
What may help is some small changes to the Bank of England’s remit, which may be announced by Chancellor George Osborne when he delivers the annual budget tomorrow. There has been a lot of speculation around how he plans to allow the bank to do more to stimulate the economy, with some suggesting he may include a growth or employment target in the remit, however I don’t think he’ll be this bold. Instead, he’ll probably simply widen the target range, or increase the time the bank has to reach it’s target, which would allow it to continue to stimulate the economy, while working within its remit.
In Europe, the German and eurozone ZEW economic sentiment figures always attract some attention. Both of these have improved significantly over the last few months, however the current scenarios in Italy and Cyprus are far from ideal, so a drop here would not be at all surprising. Given that forecasts for these figures are still fairly high, I see plenty of room for disappointment here.
[B]EURUSD[/B]
The euro recovered well against the dollar yesterday, following a difficult start to the week. The pair found resistance from the descending trend line that it originally closed above on Friday, before closing below what has previously been a key level of support. Under the circumstances, I don’t necessarily see this as a sign of weakness though, or confirmation of the break below, as I normally would. Instead, I think it’s just an initial reaction to the Cypriot bailout deal and the euro will continue to press higher once the initial shock wears off. This morning, the euro is still finding resistance from that previous support level, which could again be seen as bearish, however unless we see a break below yesterday’s lows, I think this will simply be a case of the pair consolidating ahead of the Cypriot vote.
[B]GBPUSD[/B]
The sterling rally came to an abrupt end yesterday, as traders opted instead for the safety of the US dollar. The pair has recovered again today and is trading higher early in the European session. I still think there’s plenty of room for more upside, with the target still being 1.53, given that it was previously such a strong level of support. In the mean time, the pair should find resistance around last weeks highs of 1.5175, followed by 1.52 and 1.5222.
[B]USDJPY[/B]
The dollar is trading flat against the yen this morning. The pair fell sharply yesterday, before finding resistance around 94.50, a previous level of resistance. This should act as confirmation of the previous break, prompting a move towards 97.6. The pair should first find resistance though around 96.70, last week’s highs, followed by 97.0 and 97.35.
[B]EURGBP[/B]
The euro made a small recovery against the pound yesterday after opening well below Friday’s closing price. The pair did find resistance though around 0.8575, the 61.8 fib level and a previous level of support and resistance, before pulling back slightly. This morning, it appears to be finding support from the 50 day SMA so we could see another attempt to break above the 61.8 fib level. If it successfully breaks above here, it could prompt a move back towards 0.88.
Ahead of the open we expect to see…
[B]US expected to open higher ahead of housing data[/B]
Today’s US opening call provides an update on:
[ul]
[li]Cyprus to vote against levy;
[/li][li]Future deal unlikely to include levy on deposits below €100,000;
[/li][li]US housing industry seen improving again in February.
[/li][/ul]
Stock indices in Europe are trading slightly lower this morning as traders remain risk averse ahead of the Cypriot vote later on this evening.
Cypriot government officials are expected to vote against a levy on bank deposits, later on today, in a move that will create some unease in the markets, while piling the pressure back on the Troika to come to an agreement that suits all party’s. The simple fact of the matter is, the EC, IMF and ECB don’t want Cyprus to default on its debt any more than its government does. A default would be a nightmare for the eurozone and the negative contagion that could follow would be a disaster.
A deal will eventually be struck that firstly protects all deposits under €100,000 and secondly removes at least some of the burden from those over as well. Eventually, I imagine a deal will be agreed, whereby the additional €5.8 billion is raised from a combination of funding from the Troika, a reduced levy on those holding more than €100,000 and a contribution from the Russian government, potentially in the form of extending current loans.
While even this deal is far from perfect, as it could still prompt a run on eurozone banks from depositors with large amounts of savings, it would be a huge improvement on the current deal.
Finally today we have housing data out of the US, with the number of housing starts expected to rise to 915,000 and building permits expected to remain at 925,000. The housing industry has really taken off in the US again over the last 12 months and is showing no signs of slowing, despite unemployment being stubbornly high and the economy barely growing in the fourth quarter of last year.
[B]Kiwi pushes out of long term channel, with signs pointing to confirmation of reversal[/B]
The kiwi is showing signs of a clear reversal of the uptrend in existence throughout the majority of 2012. I have written extensively in relation to how this reversal has been progressing (here) and the key movement occurred approximately three weeks ago when the price pushed below the long term ascending channel. The pair has since found resistance and support within a tight range and as such the move out of this will likely provide a confirmation or rejection of this long term reversal.
Taking a look at the stochastic, there is a clear emphasis upon retesting this current level of resistance around 0.82. However, it is likely to take a significant push to the upside in order to break this level given the existence of the 23.6 Fibonacci retracement (May 2012 low to February high).
Ultimately it is the channel between resistance (0.827) and support (0.8159) which provides the key to understanding whether the market is overwhelmingly bullish or bearish. Given the strength of the move out of the ascending channel, coupled with the clear respect of resistance my outlook is bearish for the pair, with a push towards 0.8158 and subsequently 0.812 as primary targets.
Ahead of the open we expect to see…
Today James looks at more uncertainty in the Eurozone as the Cypriot vote looms. The bailout of Cyprus has dominated financial markets over the last couple of days and look set to do so for a while longer.
Forex research: Global markets daily
[B]Bailout rejected – What next for Cyprus?[/B]
It was only ever going to be a matter of time until the debt crisis in the eurozone erupted again, however few would have guessed that it would come as a result of a failed bailout for Cyprus, which accounts for only 0.2% of European GDP.
The decision by the eurozone finance ministers over the weekend to impose a levy on Cypriot savers to the value of €5.8 billion euros in exchange for a €10 billion bailout has been met with a combination of shock and outrage by not only those in Cyprus, but around the world. The decision is the first time since the debt crisis erupted back in 2010 that savers have been forced to directly contribute to a bailout, something which until now wasn’t even on the table, with depositors being under the impression that they were protected by deposit insurance schemes up to €100,000.
The announcement was quickly followed by savers doing everything they could to get their hands on their cash and within hours, ATM’s across the country has been emptied, while electronic transfers were not available with banks closed on Monday for bank holiday. It has since been announced that banks will remain closed until Thursday, meaning savers have no way of accessing their money.
The knock on impact of this decision could be huge, given that it completely undermines previous claims that people’s savings will be protected in the case of a bailout, or a bank becoming insolvent. While we haven’t yet seen a run on the banks in other vulnerable eurozone countries, such as Spain, Italy, Greece and Portugal, that doesn’t mean we won’t. Claims by eurozone officials that this is a one-off special case will fall on deaf ears if later this year, as expected, Spain begins negotiations over a bailout. The main difference here will be that while a Cypriot default and exit will be relatively painless, a Spanish banking collapse would not.
Eurozone finance ministers have been heavily criticised for their handling of the bailout, however they are adamant that this was the only viable option under the circumstances, as a fully funded €17 billion bailout would have left Cyprus with an unsustainable debt burden. Depositors were offered shares in the banks they were saving to compensate for the levy, which would be backed by future oil reserves, however this did little to ease concerns among those having their savings taken from them without their permission.
Eurozone officials have also been quick to point out that they had not insisted on those with savings under €100,000 being subject to a levy. A single levy of 15.6% on deposits of more than €100,000 would also be acceptable as long as the total amount raised was €5.8 billion. Therefore, it was the Cypriot government that opted to tax those on less than €100,000 at 6.75% and those on more at 9.9% in a bid to try and avoid large depositors withdrawing their funds at the first opportunity, which lets be honest, is going to happen no matter what percentage is finally agreed on.
[B]The vote[/B]
The €10 billion bailout package, together with the €5,8 billion bail in was originally due to be voted on in parliament on Sunday night, however this had to be put back till Monday as President Nicos Anastasiades was unable to guarantee enough votes to get it passed. This was made all the more difficult by the fact that his Democratic Rally party does not hold a majority in parliament, meaning he was having to rely on votes from other party members, even if every member of his own party voted in favour, which was far from guaranteed.
Anastasiades was forced to postpone the vote again on Monday as he struggled to gather support for the bailout, however he wasn’t so fortunate on Tuesday when a request to postpone for a third day was rejected. This was followed shortly after by members of the ruling party publicly declaring their intention to abstain from the vote, leaving it with no chance of being passed (other parties had earlier declared that they would vote against the bailout). As it turned out, the bailout was rejected in parliament, with no votes in favour and 36 votes against. 19 ministers abstained from voting. Shortly after the vote, it was reported that Cyprus’ Finance Minister Michael Sarris had his resignation rejected, which he later rejected.
[B]What next for Cyprus?[/B]
At this stage, there appears to be very few outs for Cyprus. It’s all about coming up with a plan that limits the number of people who take withdraw their money from Cypriot banks and the only way to do that is to regain the trust of savers. One way to do this would be to look for an alternative to the levy, while offering a guarantee on all deposits, which could easily be covered by the ESM. Some would still withdraw their cash, however the run on the banks would not be as large scale as if their deposits are not guaranteed.
Another option would be for Russia to loan Cyprus the other €5.8 billion, or even the full €16 billion, in exchange for a future stake in the country’s offshore gas reserves. This would appeal to Russia given that one fifth of the deposits held in Cypriot banks belonged to Russians. It would also go some way to easing fears, at least for now, that a levy would be applied to savings in the future, again avoiding a large scale run on the banks.
One thing that still remains a real possibility is that Cyprus defaults on its debts and exits the eurozone. It’s far from an ideal scenario but with the eurozone unwilling to put up more than €10 billion, the Cypriot government unwilling to vote in favour of a levy on deposits and savers rushing to withdraw their cash which would bring down Cyprus’ banks, there doesn’t appear to be many options available.
The biggest problem that the eurozone now faces is that it crossed a line when it imposed a levy on deposits, and in turn lost the trust of savers across the euro area. If other countries now start negotiating a bailout, as Spain is expected to later on this year, people will immediately fear for their savings, even if officials attempt to reassure them that no levy will be applied.
Irrespective of what happens in Cyprus now, the damage has been done. It’s all about damage control now for the eurozone and working hard to regain the trust of savers in order to avoid a run on the banks in the future.