FBS_Official

Commerzbank: USD/JPY will test the record minimum The greenback keeps failing to jump above 77.00 yen. US currency remains in the dangerous closeness to the record minimum at 76.22 hit on March 16 that’s regarded at the key support level. Technical analysts at Commerzbank believe that USD/JPY will retest this mark today. The specialists say that if the pair goes below there, it will drop to the psychological support at 75.00 and the support line of the downtrend from 2009 to 2011 at 74.23. According to the bank, resistance for US dollar is found at 78.04 (August 1 maximum), 78.45 (July 13 minimum) and 79.16/69 (55-day MA, May and June minimums). Japan urged G7 for more coordination Japan called on Group of Seven nations to work together to counter market turmoil. It happened after equities fell in Asia hitting consumer and business confidence and worsening the global economic outlook that is already undermined by the debt problems of the developed nations. The main reason of fear is the risk that US economic recovery has stumbled. The nation’s Finance Minister Yoshihiko Noda underlined that during the next few weeks G7 has to cooperate very closely. Noda reminded that on August 8 the group’s finance ministers and central bank governors pledged to do all that is needed to ensure financial stability and growth. According to Bloomberg, Japanese Topix index fell today to 2-year minimum; China’s Shanghai Composite Index went down by 1.4%; Hong Kong’s Hang Seng index dropped by 2.4%; South Korea’s Kospi index lost about 6%. The last time G7 nations acted together was in March when they performed joint intervention to calm down volatile yen moves after the nation’s March earthquake. RBC: euro zone nations lack cooperation Analysts at RBC Capital Markets note that the euro area faces serious political risks. The specialists note that while European nations are supposed to show strong cooperation and coordination, the latest debates about the Greece’s second bailout indicate the opposite. The matter is that Finland that was reluctant of supporting indebted peripheral countries forced Greece to agree to put up collateral in exchange for a bailout loan. This made other nations – Austria, Slovenia, Slovakia and the Netherlands – demand the same from Greece. As a result, Greece will have to spend scarce money on collateral rather than on getting its house in order, while the process of July deal’s implementation stalled. There’s the risk now that other countries who do not receive collateral may not vote in favor of the loan bailout casting doubts on the survival of the currency bloc. Morgan Stanley increased yen forecasts Japanese currency is still very strong staying in the area of 76.40 yen per dollar. Analysts at Morgan Stanley argue that by the end of the year yen will climb even higher and rise to the record maximum versus its US counterpart. In their view, the actions of the nation’s monetary authorities won’t manage to change yen’s uptrend. The specialists revised down their forecasts for the pair USD/JPY from 81 to 74 yen and for and EUR/JPY from 110 to 101 yen. According to the bank, yen remains extremely overvalued relative in the longer term. Citigroup reduced US GDP forecast Analysts at Citigroup lowered US economic growth forecast from 1.7% to 1.6% in 2011 and from 2.7% to 2.15% in 2012. The estimates for the S&P 500 Index’s earnings per share were reduced from $98 to $97 this year and from $105 to $101 next year. The analysts claim that the main reason to cut the outlook for American GDP growth rate was the potential inability of political parties to agree on reducing the budget deficit as well as the fiscal tightening. Citigroup warns that if there’s no agreement, both tax increases and spending cuts larger than expected would be automatically triggered, so that very sharp tightening steps would occur in 2013 and could be sensed in financial market expectations during 2012. Yesterday there was a bunch of negative news in the United States: S&P 500 lost 4.5%, Philadelphia manufacturing PMI dropped to the minimal level since 2009, unemployment claims and consumer prices rose, while existing home sales decreased. Citigroup, however, doesn’t speak about recession. According to the bank, the US is going through weak recovery that won’t be able to gain full force.

BBH: USD/CAD will keep declining The greenback gained nearly 6.5% versus Canadian dollar after it hit the 4-year minimum in the 0.9400 area at the end of June and tested on August 9 the levels above the parity for the time since February. Then, however, US dollar weakened to the 0.9830 zone erasing about a third of its advance. Analysts at Brown Brothers Harriman claim that the pair USD/CAD may decline more. In their view, in the coming days US dollar may fall to 0.9700 and 0.9640 versus its Canadian counterpart. The specialists note that Canadian dollar strengthened due to the revival of the equity markets, in particular, US S&P 500 (CAD’s one-month correlation coefficient with the benchmark American stocks index reached 0.89). In addition, the price of the crude oil, Canada’s largest export, has also risen supporting the nation’s currency (one-month correlation coefficient is at 0.45). Strategists at MF Global advise investors to watch loonie on Friday: Canada’s CPI release and the Bank of Canada Governor’s Mark Carney’s and the Finance Minister Jim Flaherty’s speeches on the euro zone’s debt crisis and the US budget deficit will likely make the trade more volatile. Analysts at Royal Bank of Canada believe that the officials will sound more cautious than they did in the middle of July. BOTMUFJ: comments on EUR/USD The single currency went down versus the greenback from yesterday’s maximum at 1.4518 to the levels in the 1.4400 area. Analysts at Bank of Tokyo-Mitsubishi UFJ believe that EUR/USD may fall to Wednesday's minimum at 1.4320. The specialists advised investors watch US economic indicators due at 4:30 and 6:00 pm (GMT+4). RBC: comments on USD/JPY Analysts at RBC Capital Markets note that despite the fact that the market’s risk sentiment has worsened the greenback has managed to stay within its recent trading range above 76.40 yen. The pair USD/JPY has found support due to the information that Japanese Ministry of Finance and the Bank of Japan agreed to join their efforts and to work as one in order to fight yen’s strength. The specialists note that investors are now cautious of interventions. However, if US dollar doesn’t show significant advance during the next 1-2 days, the market may lose confidence in the intervention pledges and USD/JPY will go to the record minimum at 76.22 yen. BBH, Commerzbank: comments on EUR/CHF and USD/CHF Analysts at BBH think that all the talk about intervention will keep EUR/CHF between 1.12 and 1.15. Economists at ZKB note that the resistance for euro lies at 1.1555. If the single currency breaks above this level, it will manage to rise to 1.1665, while if it drops below 1.1350 would make it slide to 1.1165. Citi, Commerzbank, BBH: GBP analysis EUR/GBP The single currency declined from the levels around 0.8800 to the 0.8700 zone. Technical analysts at Commerzbank note that support for EUR/GBP lies at 0.8668/44 (August minimum). The slide below this area will bring euro down to the 55-week MA at 0.8612 and to the 4-year uptrend line at 0.8556. If the pair climbs above 0.8883/86 (late July maximum and current August peaks) it will be able to stabilize and get chance to rise to 0.8977/0.9000. Currency strategists at Citi believe that EUR/GBP may move only a bit down on the fears about the euro zone’s debt crisis as the pound may suffers as well because UK banks have a sizable 14% GDP exposure to weak euro-zone countries, surpassing that of Germany and France, while that the euro zone remains the UK's largest trading partner and exports are seen as a preferred way out of the crisis in the UK. GBP/USD Analysts at Brown Brothers Harriman believe that British pound is overbought versus the greenback. In their view, GBP/USD may consolidate between 1.6480 and 1.6600. According to Citi, the pair will keep getting support from the fiscal austerity in the UK, though the further deterioration of the economic growth will likely put sterling under negative pressure. Morgan Stanley: US growth forecast reduced Analysts at Morgan Stanley reduced their forecast global economic growth in 2011 from 4.2% to 3.9% and in 2012 – from 4.5% to 3.8%. As the main reason for the downside revision the specialists cited the debt burdens of developed nations. According to the bank, the policymakers didn’t do enough to contain the euro zone’s debt crisis, while the business and consumer confidence weakened due to the German economic slowdown and the looming threat of the recession in the United States. In addition, the situation is complicated by the fact that many governments have to conduct austerity measures. The bank diminished prediction for G10 nations from 1.9% to 1.5% this year and from 2.4% to 1.5% in 2012. Fiscal tightening will have a negative impact on the demand in the Western world that, in its turn, will affect Chinese economy. Morgan Stanley cut the projections for China’s growth from 9% to 8.7% (in 2012), while Deutsche Bank lowered the forecast from 9.1% to 8.9% (in 2011). Pimco: Greece has to dafault to save Spain and Italy Economists at Pacific Investment Management Co., the world’s largest bond fund manager, believe that the European policymakers should allow Greece, Ireland and Portugal default making sure that Italy and Spain will be able to avoid this fate. The specialists note that while the region’s authorities are reluctant to admit the necessity of such desperate step, the situation keeps deteriorating. According to Pimco, Germany, France, the International Monetary Fund and the European Central Bank have to come up with a huge bailout package available to the entire euro zone, except for Greece, Ireland and Portugal, thus letting these indebted peripheral nations default and making Italy and Spain safe. As French President Nicolas Sarkozy and German Chancellor Angela Merkel rejected at their summit on Tuesday, August 16, the idea of creating the common euro zone bonds and the expansion of the 440 billion-euro ($633 billion) rescue fund, Pimco thinks that the most likely scenario will be that the ECB will keep supporting the problem nations, while it itself will be bailed out by Germany. MIG Bank: bullish view on GBP/USD The pair GBP/USD climbed from August 11 minimum at $1.6110 to yesterday’s maximum at $1.6591. Technical analysts at MIG Bank believe that although today sterling has pulled back to the $1.6475 area, the outlook for British currency remains positive. The specialists think that when pound once again overcomes the $1.6476/78 zone, it will gain enough strength to rise to $1.6747. In their view, support for GBP/USD lies at $1.6111. It’s also necessary to note that pound has risen above the long-term trend-line resistance (watch the weekly chart).

Goldman Sachs: QE3 in the US is very likely Analysts at Goldman Sachs are sure that the third round of quantitative easing in the United States is coming later this year or at the beginning of 2012. The reason why the additional monetary stimulus is needed is the US economic growth slowdown and high unemployment rate. The possibility of QE3 rose as on it last meeting that took place on August 9 the Federal Open Market Committee pledged to keep the interest rates at the record low at least until the middle of 2013 that means that US monetary authorities are ready to act employing more policy tools if the economic outlook keeps worsening. According to Goldman, though not all members of the FOMC support the idea of the new QE – Presidents Fisher, Kocherlakota and Plosser spoke against loosening policy – that won’t stop the Fed’s Chairman Bernanke from pushing through the measures. It’s necessary to note that though there are different forms of stimulus from the small steps such as a commitment to keep the balance sheet large, a gradual shift of the securities portfolio into longer maturities or a cut in the interest rate on excess reserves from 0.25% to 0% to very aggressive ones such as rate caps (a form of QE in which the Fed promises to buy as many securities as needed to hit a longer-term yield target), a price level or nominal GDP target, or interventions in non-government securities markets (for which funding from Congress would be needed). Goldman specialists say that from all the measures mentioned the conventional QE seems to be the most acceptable option. To sum up, the economists expect quantitative easing to be resumed, but see several risks to such forecast: stronger economic performance, higher inflation and public backlash. As for the latter, the Fed may try to smooth the situation by proposing monthly numbers that not look as big as the $600 billion purchase over 8 months announced last year. In addition, the decision of continuing the program may be made on the monthly basis as well that would also improve the negative sentiment. Danske Bank: EUR/USD will rise in a year Currency strategists at Danske Bank came up with concrete forecasts for the pair EUR/USD. The specialists note that the United States face weaker than expected growth, long period of minimal interest rates, large current account deficit as well as the serious fiscal challenges and increased political risks. As a result, in medium-term the bank is bearish on the greenback and thinks that in such conditions the single currency will be able to gain. According to Danske Bank, euro will rise to $1.50 versus its American counterpart in a year. The previous forecast was at $1.36. The 3-month estimate though was reduced to $1.42 on the expectations of weak macro data during the next few months. Commerzbank: comments on GBP/USD Technical analysts at Commerzbank note that if British pound managed to rise versus the greenback above the downtrend resistance line from May maximums in the $1.6444 zone, it will head up to $1.6539/47 (78.6% Fibonacci retracement of the decline from April peak and May high). Never the less, pound still didn’t manage to overcome the mentioned resistance: the pair GBP/USD slid today from August high at $1.6475 posting the low at $1.6347. BarCap: Merkel and Sarkozy disappointed investors Yesterday’s meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel didn’t bring much results. The leaders of the biggest euro zone’s economies, which are expected to lead efforts to contain the debt crisis, spoke about the plan to form a euro-zone economic council, but didn’t voice support for the creation of the common euro-zone bonds at it may affect the region’s healthiest economies. The market regards the common bonds as the last chance to improve the situation. Merkel and Sarkozy called for spending cuts and other long-term measures to bring down debt levels but offered no immediate solutions. Analysts at Barclays Capital note that the markets were disappointed by the focus on long-term governance issues lack of the concrete steps at the time when it’s very important to encourage the economic growth. In the second quarter German GDP growth pace slowed down to 0.1%, while the economists were looking forward to 0.5%. The economic growth pace of the entire euro area during the same period accounted only for 0.2%, while during the first 3 months of 2011 this indicator was equal to 0.8%. BNP Paribas: SNB failed to affect the market The Swiss National Bank for the third time tried to weaken the national currency. Switzerland’s central bank announced today that it will boost liquidity to the money market expanding banks’ sight deposits from 120 to 200 billion francs ($253 billion). The SNB also decided to repurchase outstanding SNB Bills and use foreign-exchange swap transactions. Economists at Credit Suisse think that the SNB has other means of action, but for it just keeps pursuing this liquidity strategy. Analysts at BNP Paribas note that the market was looking forward to interventions or a peg and got disappointed by the outcome. In their view, it will be very difficult for the Swiss monetary authorities to act against the market that’s seeking refuge in franc. The bank thinks that it would be near impossible for policy makers to peg the franc to the euro and commit to unlimited currency interventions as it would be too expensive and wouldn’t guarantee success. UBS specialists think that the SNB’s move didn’t impress the market. Taking into account the lack of results after yesterday's Franco-German bilateral summit, the bank says that euro may drop back to 1.10 and even lower. The pair EUR/CHF is still trading under 1.5000. Today it hit the low at 1.1221. Commerzbank: EUR/USD will go down again In the morning the single currency hit the day’s minimum versus the greenback at $.4320. Then it found support and jumped above the 4-month downtrend resistance line at $1.4435. Never the less, technical analysts at Commerzbank believe that euro’s advance will stall in the between the broken resistance and July 27 maximum at $1.4537 and the pair EUR/USD will return down to the 38.2% Fibonacci retracement at $1.4259. MPC unanimously voted to keep rates at 0.5% According to the minutes of the Bank of England’s Monetary Policy Committee August meeting released today, the 9-member MPC unanimously voted to leave the benchmark interest rate unchanged at 0.5%. The two hawks – the BoE’s chief economist Spencer Dale and the external policymaker Martin Weale – abandoned their calls for the rate hike. It’s also necessary to note that the odds of the second bout of quantitative easing in the UK have strengthened. This time only Adam Posen repeated his proposition to raise the QE program by 50 billion pounds to 250 billion pounds, several other members seems to consider the idea. The debt crisis in the euro area, US economic slowdown and UK's own problems persuaded the committee that inflation would fall to its 2% target without the increase of the borrowing costs. The pace of British CPI growth rose from 4.2% in June to 4.4% in July. Rabobank International notes that the minutes were clearly dovish, though the BoE Governor Mervyn King had already indicated earlier that central bank could remain on hold until 2012. Currency strategists at Credit Suisse believe that if cyclical indicators deteriorate during the next few weeks, there will be likely more votes for QE in September.

BNY Mellon: EUR/CHF will resume its decline The single currency managed to make yesterday the biggest advance versus Swiss franc since it was launched in 1999 – the pair EUR/CHF climbed from 1.0252 to the day’s maximum of 1.0929. It happened as franc slumped after the Swiss National Bank’s Vice President Thomas Jordan claimed that there’s a possibility of franc’s temporary peg to euro. Currency strategists at UBS think that such measures would require constant efforts on the SNB’s part to defend franc’s trading range as investors continue buying franc as a refuge. As a result, the central bank more obligations to intervene. Analysts at Bank of New York Mellon believe that the SNB won’t be able to defeat the high demand for franc as for the safe haven and Swiss currency will resume strengthening the next week. HSBC: investors bet on euro’s collapse Analysts at HSBC believe that the fact that investors are massively selling Italian and Spanish bonds means not only that they have negative view on the prospects of these nations, but that the market fears the single currency will collapse. According to the economists, if euro breaks apart, some former European currencies such as the Deutschemark will gain, while the others like Italian lira will weaken. To trade on this assumption means to sell Italian debt versus German one and that’s exactly what has been happening during the last few weeks, says HSBC. The strategists say that Italy's fiscal management has been better than that in several other countries, so the market players bet not against Italy specifically, but against the euro. BoA Merrill Lynch: dollar will keep being steady Analysts at Bank of America Merrill Lynch note that after the S&P cut US credit rating the greenback performed surprisingly well. In their view, dollar will keep being steady at rather strong positions. The specialists say that investors are going to the nations where growth prospects look stronger. Never the less, the bank doubts that US currency will weaken even if the Federal Reserve goes down the path of quantitative easing over the next 6 months. The economists claim that though in the past, when the U.S. economy has weakened, it's been negative for the greenback, if the slowdown spreads to the rest of the world and to the emerging markets in particular, the impact on US dollar will be quite positive. According to Bank of America, there’s a real possibility of the global economic slowdown. As for the short term, however, the specialists favor British pound and Japanese yen. In their view, sterling is a good alternative for those who are nervous about US dollar or the single currency, while yen will be supported by strong fundamentals despite the risk of Bank of Japan’s interventions. BBH: trading recommendations on EUR/USD Currency strategists at Brown Brothers Harriman advise traders to watch next week the economic data as well as the tensions in the euro zone peripheral nations and the signal from the equity market. Euro area’s flash GDP for the second quarter is released on Tuesday, August 16, at 1:00 pm (GMT+4). Weaker Euro zone growth in an environment of slowing global activity, government austerity and a banking crisis would add pressure on the euro and global economic confidence. French President Nicolas Sarkozy meets German Chancellor Angela Merkel meet the same day in Paris amid market turmoil that prompted France to speed up completion of its 2012 budget. The French government’s commitment to its deficit goals is “untouchable,” Sarkozy said. BBH expects that the meeting will provide an initiative in an attempt to stem the slide in French bank shares. According to BBH, EUR/USD will remain in the recent range between $1.40 and 1.45. The specialists recommend selling euro as it rises to the top of this area until the European authorities do something more concrete to stem the crisis.

Societe Generale: China’s inflation reached new maximum According to the data released today, China’s inflation pace rose to the maximal level in 3 years. Consumer prices increased in July by 6.5% on the annual basis, while the economists expected the CPI to rise by 6.4% as it was in June. The nation’s PPI added 7.5% last month from the previous year, showing the biggest gain in almost 3 years, while food costs climbed by 14.8%. The Shanghai Composite Index fell by 20% from its maximum in November. Analysts at Societe Generale note that in normal conditions rising inflation would make Chinese authorities raise the borrowing costs, but given the current uncertainty at the global financial markets the policymakers will likely delay tightening. Analysts at Royal Bank of Canada expect one more rate hike in the next few months, while UBS and Standard Chartered forecast no more rate increases this year. The specialists at UBS claim that the pace of CPI growth may decline to 4% by the end of the year. Analysts at Mizuho Securities believe that the average inflation this year will be at 5.3% that’s 1.3 percentage points higher than the government’s target. Economists at Credit Suisse remind that China will get vulnerable if the global economy slows down sharply as that will have negative impact on Chinese exports and consumption. Strategists at Bank of America Merrill Lynch think that in order to support national economy China may use fiscal measures such as increase of spending on social housing and water infrastructure instead of easing its monetary policy.

Moody’s once again confirmed top US rating Moody’s Investors Service confirmed US top Aaa rating for the second time in a week. It happened after another major rating agency, Standard & Poor’s, downgraded the world’s largest economy. It’s necessary to note that Moody’s left the outlook for American debt ranking negative. The agency underlines that the greenback remains the main reserve currency and this fact allows the United States to have higher debt levels than other countries. In addition, Moody’s notes that US authorities have made much effort to fix the debt & deficit issue. The agency also pointed out that the nation has “unparalleled size and diversity” and enjoys “political and institutional stability”. According to Moody’s, to keep the top rating the US has to hold its debt at “not far above” 75% of GDP by about 2015 – this ratio is forecasted for 2012, this year it’s expected to be 69.8%. The downgrade may happen before 2013 if US fiscal discipline or economic outlook deteriorates. American stock markets fell by the most since December 2008. By the end of Monday’s US trading session Down Jones Index fell by 5.55%, S&P 500 contracted by 6.66%, while Nasdaq 100 lost 6.11%. At the same time, US dollar rose as even now it’s still perceived as a refuge. Yields on Treasury 2-year notes reached a record low. RBS, SocGen on ECB's decision to buy Spanish and Italian debt As the euro zone’s policymakers failed to stop the spreading of Greek debt crisis the European Central Bank had to start acting to save euro: yesterday it began buying Italian and Spanish assets. To do this, the ECB will need to expand massively its balance sheet. Moreover, the central bank risks being accused of breaching a key principle in the euro’s founding treaty by bailing out the nations that didn’t abide the terms of Stability and Growth Pact. Since starting its bond purchases in May last year, the ECB has bought about 74 billion euro of assets to help stabilize Greek, Irish and Portuguese markets. Four months ago the ECB ceased bond purchases trying to force the governments to find the solution of the debt issues on their own and engaged in counter-inflation moves. Daiwa Capital Markets notes that the ECB may lose its credibility. According to the analysts, the euro area’s central bank will have to buy about 200 billion euro ($287 billion) of Italian bonds and 60 billion euro of Spanish securities to ease the pressure on these nations. Strategists at ING warn that as the ECB will have to spend very large sums – about 50 billion a week – to make an impact on the market, it may not be able to continue to sterilize its purchases by absorbing the equivalent amount from banks via term deposits. That would significantly increase the money supply in the region stimulating inflation that opposes the central bank’s principles. Economists at Royal Bank of Scotland expect ECB to buy on average about 2.5 billion euro of bonds a day – that would make 600 billion euro in a year. The specialists note that the European Central Bank may keep doing that until the European Financial Stability Facility is allowed to purchase bonds on the secondary market and could end with the half of the traded Italian and Spanish debt in its assets. Analysts at Societe Generale believe that the ECB purchases may do some good, but won’t solve the fundamental problems. In their view, the euro area has to become fiscal union for that. Kenneth Rogoff: the Fed may relaunch QE Harvard University economist Kenneth Rogoff sees the possibility of the third round of monetary easing in the United States as high. In his view, the Fed is likely to act to support US economy. The specialist says that US central bank has to be more decisive in this. At the same time, Rogoff claims it’s not clear whether the Federal Reserve’s Chairman Ben Bernanke will manage to immediately gain the support of Federal Open Market Committee members for more easing. Last month after QE2 ended in June Bernanke outlined policy options including additional asset purchases or strengthening the commitment to low interest rates. The FOMC meeting takes place today and its statement is released at 10:15 pm (GMT+4). Analysts at JPMorgan Chase, BNP Paribas and Goldman Sachs also believe that the Fed will pledge to maintain record monetary stimulus. According to them, the central bank will probably make commitment to hold its $2.87 trillion balance sheet steady for an extended period. Rabobank: Swiss franc will keep strengthening Currency strategists at Rabobank believe that the demand for Swiss franc as a refuge will remain high and the Swiss National Bank is unable to prevent the strengthening of the national currency. The central bank has already cut the borrowing costs last week narrowing the range of the interest rates from 0.00-0.75% to 0.00-0.25%. Another reduction simply won’t have much impact at the currency market, while the intervention will be too costly, says the bank. According to the specialists, there’s a strong risk that the situation in the euro zone deteriorates, so the odds that franc will keep appreciating are high. The single currency has renewed today the record minimum versus franc sliding to 1.0476. Analysts at Commerzbank note that as long as the pair EUR/CHF is trading below 1.1020, it will remain under bearish pressure. The pair USD/CHF has also dropped to the all-time low at 0.7359. Jyske Bank: EUR/USD will break down current range Technical analysts at Jyske Bank believe that the pair EUR/USD will continue trading within the recent range between 1.4055 and 1.4450 for some time. Then the specialists expect the single currency to break down falling to 1.3746 in the middle of August. UBS: bearish view on USD/CHF Technical analysts at UBS are bearish on USD/CHF. The pair is currently trading just above the record minimum at 0.7359. The specialists say that there isn’t much support for the greenback until the psychological level at 0.7000. Resistance for American currency is found at 0.7741.

S&P reduced US credit rating Standard & Poor’s reduced US credit rating by one notch on August 5 stirring up concerns about the nation’s fiscal health. The agency kept negative outlook for American rating as it’s not clear whether the Congress will end Bush-era tax cuts or tackle entitlements. According to S&P, if spending reductions are lower than agreed to, interest rates go up or the general government debt rises, the rating may be cut from AA+ to AA within 2 years. The other leading agencies – Moody’s Investors Service and Fitch Ratings – confirmed their top estimates of US debt on August 2 when President Barack Obama signed a bill that helped United States avoid default. Moody’s and Fitch also underline the possibility of downgrades if lawmakers fail to enact debt-reduction measures and the economy weakens. The pair USD/CHF hit the record minimum in the 0.7530 area. The pair USD/JPY dropped from the intervention maximum at 80.23 hit on August 4 to the levels in the 77.80 zone. Commerzbank: comments on USD/CHF and EUR/CHF Technical analysts at Commerzbank claim that below the 25-year support line in the 0.7554/0.7550 area the greenback has no support versus Swiss franc until 0.7410 and then 0.7160, the base of the 2010-2011 channel. In the near-term the divergence in 4-hour charts and the divergence of the daily RSI indicate the possibility of an upside correction. The specialists note that resistance for USD/CHF is situated at 0.7725. In order to strengthen to the 6-month downtrend line at 0.8285, US dollar has to overcome the accelerated downtrend at 0.7944. The bank recommends squaring trades, attempting tiny shorts on a rebound to 0.7725 adding at 0.7825, stopping at 0.7945 and covering position at 0.7410. UBS: the pair AUD/USD will fall to parity Technical analysts at UBS give bearish outlook for AUD/USD. In their view, Australian dollar will go down well below the parity with its US counterpart. The specialists note that S&P’s decision to downgrade the US will strongly increase the market’s risk aversion in the coming days. Aussie may get under significant downside pressure due to the weaker equities and falling commodity prices as well as due to the general increase in forex volatility, claims UBS. On the downside, support levels for the pair are found at 1.0330 and 1.0290. On the upside, resistance levels lie at 1.0440 and 1.0470. BBH: dollar won’t suffer much from US downgrade Currency strategists at Brown Brothers Harriman believe that US downgrade won’t strongly affect US dollar’s rate. According to BBH, American currency will be driven by the rating cut only in the shortest term. The specialists expect the greenback to consolidate versus its main counterparts. In their view, the pair EUR/USD will stay in the recent broad range between $1.4000 and $1.4600. The analysts think that the pair GBP/USD will keep trading between $1.6200 and $1.6600.

Scotia Capital: recommendations ahead of BoE and ECB meetings There are 2 central banks’ meetings today – the market will be watching Bank of England’s rate decision at 3:00 pm (GMT+4) and the European Central Bank’s one at 3:45 pm (GMT+4). Analysts at Scotia Capital believe that both central banks will keep the borrowing costs unchanged. In their view, there will be nothing worth attention about the BoE comments, while ECB President Jean-Claude Trichet may sound cautious that will put the single currency under negative pressure. The specialists recommend opening shorts on EUR/GBP in the 87.40 area stopping at 88.50 and targeting 84.00. Commerzbank: comments on USD/CHF and EUR/CHF The greenback rebounded from the record minimum versus Swiss franc in the 0.7600 area and is on its way up to 0.7800. Technical analysts at Commerzbank note that there are signs of reversal after the Swiss National Bank eased yesterday its monetary policy. The RSI on dollar shows that it’s oversold. The specialists expect the pair USD/CHF to stabilize above the 25-year support line at 0.7554/50 that connects the minimums from 1987. As for the pair EUR/CHF, it also is trying to stabilize after it once again tested 1.0795/1.0800, claims the bank. According to Commerzbank, resistance levels for the pair are situated at 1.1216 (38.2% Fibonacci retracement of the most recent decline) and 1.1365 (July 18 minimum). As long as the single currency is trading below these levels it risks falling to 1.0775 and 1.0550. Yoshihiko Noda: Japan conducted one-sided intervention Japanese Finance Minister Yoshihiko Noda confirmed that the Bank of Japan intervened today in the interbank market buying US dollars versus yen. Noda didn’t unveil the details such as the scale and the levels of the one-sided intervention. According to the market’s estimates, the BOJ sold more than 1 trillion yen. Some traders even think that the amount may be even higher than that of the biggest one-day intervention conducted on September 15. Japan’s central bank stepped in trying to stem the appreciation of the national currency after the Swiss National Bank moved yesterday in the same direction. Both Japanese yen and Swiss franc are safe haven currencies that tend to strengthen during the times of high risk aversion like it has been so far. That makes Japan’s and Switzerland’s economies hurt. The pair USD/JPY surged from 76.95 and approached the 80.00 level. Analysts’ comments on BOJ intervention Mizuho: it was the right timing to step in taking into account the weak manufacturing PMI data and due to the fact that after Switzerland’s action yesterday there was a risk that yen would have extended gains alone. UBS: it’s not clear whether the intervention is designed to slow the yen's gradual advance or to defend a line in the sand. Any attempt to encourage a reversal of the yen's multi-year uptrend will fail. Japanese Finance Minister Yoshihiko Noda has already noted that the nation’s monetary authorities may use the tactics deployed in 1995 that involved an eight-month campaign of sporadic and sometimes daily interventions. So, investors should be ready to more active steps of the BOJ. Westpac: historical experience allows assuming that the BOJ action will support USD/JPY for a few days maximum, but won’t be able to change the general downtrend. RBS: monetary authorities won’t be able to change USD/JPY downtrend. US dollar will remain weak due to the concerns about American economic slowdown and expectations of more quantitative easing by the Federal Reserve. Societe Generale: the BOJ aims for new range and not for trend reversal. Yen is driven primarily by falling US yields. It’s good for Japan that taking into account US debt issues American yields can't fall much further. Today’s intervention may help dollar to get firm support at 76.00. However, in order to return to the levels in the 80.00 area the outlook for Fed’s rates, not for BOJ ones, has to change. Citigroup: BOJ may have greater resolve than in March or September. The pair USD/JPY is facing resistance in the 79.50/80.00 zone. Credit Suisse: intervention can’t be called successful until yen gets below 80 against US dollar. BBH: comments on euro zone’s agenda Analysts at Brown Brothers Harriman note that today’s ECB meeting will be very important taking into account intensifying stresses in the euro area. The specialists underline that the markets will watch if Trichet gives hawkish comments using his coded language. It may happen that the European Central Bank will decide to pause its tightening cycle given the fact that the region’s economy is weak and the Swiss National Bank eased its monetary policy yesterday. In addition, there will be some political news from Europe. Italian Prime Minister Silvio Berlusconi will speak before parliament and Spain’s Prime Minister Jose Luis Zapatero canceled his holiday in order to address problems in Spain. BBH specialists, however, think that such measures won’t help to increase investors’ confidence in the ability of euro zone’s authorities to overcome the crisis. In their view, European policymakers will act only in case another serious slump of the market.

SNB cut rates to weaken franc The Swiss National Bank loosened its monetary policy today in order to stem excessive appreciation of the national currency. Comments from SNB: - Franc is currently massively overvalued - Switzerland’s economy at threat, outlook worsened - Deflation risk grows The central bank: - is aiming to keep 3-month Libor rate as close to 0 as possible – the target range narrowed from 0.00-0.75% to 0.00-0.25%; - will increase the supply of liquidity to franc’s money market during the next few days; - is planning to expand banks’ sight deposits at the SNB from 30 to 80 billion francs; - no longer renew repos and SNB Bills that fall due and will repurchase outstanding SNB Bills, until the desired level of sight deposits has been reached. - is watching the foreign exchange market; - will act to stem franc’s appreciation if it’s necessary. The SNB’s move helped to ease Swiss franc down from its record maximums versus the single currency and the greenback. The pair EUR/CHF rose from 1.0794 to the levels above 1.1000, the pair USD/CHF went up from 0.7607 to the levels in the 0.7760 zone. Paul Krugman: US has to increase but not reduce spending Nobel Prize winner Paul Krugman believes that US President Barrack Obama was wrong to compromise with Republicans on the debt ceiling agreement that includes government spending cuts. The famous economist thinks that the cuts will decrease the nation’s GDP while American economy is already weak. Krugman underlines that the bill doesn’t imply such measures as the extension of unemployment benefits as it was widely expected, so the country is likely to face the severe fiscal tightening. In his view, the austerity measures mean that US authorities are making the same mistakes as during the Great Depression. If the specialist was one in charge and there weren’t any political constraints he would increase spending as that could be financed at a relatively low interest rate.“The federal government can borrow. It can borrow with inflation-adjusted bonds at an interest rate at 0.3%. So this is a really good time to borrow for infrastructure spending, which we badly need and which would create jobs at a time when we badly need jobs,” says Krugman. According to him, the unemployment benefits are necessary to sustain spending power, though Krugman understands that now America can’t afford health care or entitlement spending as it needs more revenue in the longer term. Scotia Capital: low demand for both euro and dollar With much struggle the euro area and the United States are both through the major decisions aimed to improve the situation and reduce risks. Never the less, investors don’t hurry to rush in euro and dollar. Strategists at Scotia Capital believe that EUR/USD will trade in range between $1.3950 and $1.4700 and finish the third quarter at $1.45. The specialists note that, on the one hand, the European economic outlook remains uncertain due to the risk of slowdown combined with austerity measures that will certainly keep euro under pressure. On the other hand, dollar will suffer from high US fiscal deficit and debt and deteriorating economic prospects. The evidence for the latter is weak GDP readings, ISM PMI falling to 50.9 and declining consumer confidence. Analysts at Goldman Sachs claim that the pair may climb to $1.55 in a year, though, according to their forecast, the single currency will be able to strengthen more due to the general weakness of the greenback than to some euro-related factors. As a result, the odds are that EUR/USD will trade sideways for the rest of the year, so it’ probably better to trade another crosses. BarCap, RBS: Japan will follow SNB's example Analysts at Barclays Capital believe that franc may be no longer regarded as the safe haven after the Swiss National Bank eased monetary policy to keep franc from further appreciation, so investors will likely turn to Japanese yen. As a result, the pressure on Japan’s monetary authorities will strengthen. According to BarCap, Japan must act quickly to stem yen’s advance if it means to do so. Strategists at RBS note that the Bank of Japan will seriously consider the option of easing monetary policy. The economists underline that Japan and Switzerland are facing similar challenges with regard to the strength of their currencies used as refuges from the European and US debt problems. In their view, it would be easier for Japanese officials to decide on intervention than it was for SNB which lost billions in 2010 trying to stem franc. RBS expects Japan's MOF to intervene after US non-farm payrolls data is released on Friday. UBS, UniCredit: comments on the SNB Analysts at UniCredit believe that today’s move of the Switzerland’s central bank will help to stabilize franc’s rate even if from the fundamental point of view the situation hasn’t changed. The specialists think that the SNB was absolutely right to step in. As the Swiss National Bank mentioned that the nation’s growth outlook has substantially deteriorated, the risk of a recession strongly increased. Strategists at UBS expect more interventions from the Swiss National Bank as the euro zone’s issues may keep the franc attractive for investors and more easing will be needed to stem its gains. In their view, the previous SNB interventions came at wrong times and acting at current levels could be more effective. NBER Committee about US economic prospects US economic recovery that has been lasting for 2 years is now obviously losing its pace. Economists at Business Cycle Dating Committee of the National Bureau of Economic Research, which determined the dates of recessions, don’t seem very optimistic about the nation’s growth prospects. Committee members believe that weakness in housing, employment, and business confidence and efforts to reduce debt by consumers and government are the main obstacles to growth. While the committee doesn’t forecast the odds of a recession, individual members can make their own predictions. Here are their comments reported by Bloomberg. Martin Feldstein (Harvard University): now there’s the 50% chance of the US falling into new recession. Robert Hall (Stanford University): the slower the growth rate, the more likely it is that an adverse shock would cause a recession. Consumption declines as debt repayments are reducing spending even this long after the crisis. Christina Romer (University of California): the risks of another recession have gone up for compared to what was 6 months ago. The economist expects anemic, but positive, growth. James Stock (Harvard University): new shock could spark a downturn, similar to the contraction after oil prices jumped with Iraq’s invasion of Kuwait in 1990. Business confidence has been shaken by the months-long debate over raising the debt ceiling. Jeffrey Frankel (Harvard University): spending cuts will reduce US economic growth next year. Robert Gordon (Northwestern University): the aftereffects of the housing bubble keep affecting the economy. Moody’s and Fitch about US credit rating Moody’s Investors Service and Fitch Ratings confirmed US top credit ratings but warned that the nation may be downgraded if it doesn’t manage to reduce the debt and its economy continues weakening. Moody’s claimed that the decision on the rating may be made within 2 years or “considerably sooner”. According to Fitch, the ratio of general government debt, including state and local governments’ debt, will reach 100% of GDP in 2012. That’s the most of any AAA-ranked country. The agency points out that while the rating may be cut in the medium term, the near-term risks aren’t very high as the agreement on lifting up the debt ceiling and cutting deficit is only a first step. Fitch plans to finish the rating’s review in August. For now the threat of US downgrade was overweighed by concerns about the nation’s economic slowdown that has been supporting demand for Treasuries. The yield on the 10-year bonds fell to 2.59% approaching the minimal levels since November and staying below the decade’s average of 4.05%. Analysts at JPMorgan Chase believe that in case of the downgrade US borrowing costs will be increasing by $100 billion a year, while 50-basis-point increase in Treasury yields would reduce American economic growth by about 0.4 percentage points.

Compromise in the US: market’s sentiment improved The pair USD/JPY jumped today from the 4-month minimum at 76.88 hit on Friday to 78.04 and then eased back down to the 77.30 area. The pair USD/CHF is also trading above the all-time minimum at 0.7853. It happened as US President Barack Obama announced that the White house and the Congress have at last agreed on the plan to prevent a default. The agreement includes raising the nation’s debt limit by $2.1 trillion and cutting the federal budget deficit by $2.5 trillion over a decade. The analysts at Canadian Imperial Bank of Commerce note that the tension level has eased as at the end of last week investors got nervous about the lack of compromise on the back of an approaching deadline. It’s necessary to note, however, that the risks of the United States losing top AAA credit rating remain high. Last week S&P said that if the spending cuts have to be lo less than $4 trillion to rule out the threat of the downgrade. Currency strategists at Bank of America Merrill Lynch note that spending contraction will make the Federal Reserve keep the rates unchanged for a long time. In their view, there will be no hikes until US economic growth pace is below the long-term trend of 3%. Analysts at Barclays Capital think that the Fed will stay on hold during the whole next year. According to the data from Commodity Futures Trading Commission, net bets against dollar rose to 310,222 contracts as of July 26 from 272,444 a week before. BNP Paribas, JP Morgan: QE3 possible in the US Analysts warn that the US economy risks falling in another recession. American GDP gained 1.3% in the second quarter on the annual basis, while the first quarter figures were revised down to 0.4% that is the lowest level since the recovery began in June 2009. The Q2 GDP accounted for $13.27 trillion that is lower than $13.33 trillion peak in the final quarter of 2007. It’s necessary to note that the recession data has been so far revised down by 25%: according to the latest figures, during the period from the fourth quarter of 2007 to the second quarter of 2009 US economy contracted by 5.1%, while the previously reported reading showed 4.1% drop. The experts see the future outlook for America as rather dim. Economists at Deutsche Bank lowered the forecast for the third quarter from 3.5% to 2.5% and from 4.3% to 3 for Q4. Barclays Capital decreased estimates for the third quarter and the following five by a percentage point. Analysts at BNP Paribas and JP Morgan believe that the slowdown may make the Federal Reserve consider the possibility of the third round of quantitative easing. Strategists at Societe Generale think that the greenback won’t be able to gain much in the current conditions. Barclays Capital: comments on USD/JPY Analysts at Barclays Capital note that at the beginning of today’s trading day the greenback managed to rise to 78.05 regaining the grounds lost on Friday but then was stopped by the resistance and returned down to the 77 yen area. The specialists believe that the 78.05 level will now represent the key obstacle for USD/JPY. As long as the pair is trading lower, it risks falling to the record minimum at 76.25 hit on March 16. If US dollar closed higher, it will be able to rise to 79.35/60. According to Barclays, the first scenario seems to be more possible. UBS: forecasts for USD/CHF and EUR/CHF Swiss currency that eased down versus the greenback after the news that US authorities have reached compromise on the debt ceiling, has once again renewed the record maximum. Currency strategists at UBS note that franc remains near all-time highs against all of its main counterparts as the uncertainty levels are still high. According to Switzerland’s Economy Minister, the appreciation of the national currency isn’t temporary and one should expect it to decline soon. The official underline that this would affect the country’s economy. In his view, the unemployment is likely to increase. UBS specialists give the following forecasts for USD/CHF and EUR/CHF: 0.86 and 1.20 respectively in a month and 0.89 and 1.25 – in 3 months. Commerzbank: EUR/CHF keeps falling The single currency once again renewed the record minimum versus Swiss franc falling to 1.1262. Economists at Brown Brothers Harriman note that this means that the potential resolution to the US debt ceiling will turn the market's focus back to the euro-zone peripheral nations. Technical analysts at Commerzbank believe that EUR/CHF is on its way down to the support line of the downtrend from April to July at 1.11. According to the bank, the pair will find support at the psychological level of 1.10 and then only at 1.0775. The unemployment rate isn’t likely to decline The majority of analysts are rather pessimistic about US Non-Farm Payrolls data due on Friday, August 4, at 16:30 (GMT+4). It’s thought that the payrolls won’t rise high enough to reduce the unemployment rate. Economists surveyed by Bloomberg News expect American employers to create 90,000 jobs in July after 18,000 in June, while the unemployment rate is seen at the same 9.2% level. Analysts at ING Bank note that the US firms and households are very cautious due to the high uncertainty and the companies seem to be very reluctant about hiring new people. The shortage of jobs will likely affect consumer spending increasing the risks for the economic growth. Consumer spending added 0.1% in the second quarter, the smallest gain since the same period of 2009. Analysts at Pierpont Securities note that for the unemployment rate to remain unchanged payrolls have to add 125,000 a month, while in order to reduce it by percentage point over a year they should increase by 200,000 a month.

Moody’s put Spain's credit rating on revision Moody’s Investors Service announced that it may lower Spain’s Aa2 credit rating. According to the agency, although Spain has relatively low public debt ratio compared to other European Union nations, “challenges to long-term budget balance remain due to Spain's subdued economic growth and fiscal slippage within parts of its regional and local government sector.” The nation’s Prime Minister Jose Luis Rodriguez Zapatero claimed that the elections will be held November 20 instead of March in order to ease political tensions in the country. The ruling Socialist Party became unpopular as Zapatero began conducting austerity measures. Analysts at Commerzbank pointed out that the concerns about the euro area are still very high that makes the single currency very vulnerable. The specialists are bearish on the single currency. Spanish 10-year bond yields rose by 5 basis points to 6.09%, while Italian ones increased by 8 basis points to 5.92%, nearing the 6% mark seen as unsustainable in the long term. The pair EUR/JPY fell to 110.32, the lowest level since July 13.

Credit Suisse: SNB once again posted losses Swiss National Bank has posted the loss of 10.8 billion Swiss francs ($13.5 billion) in the first half of the year as euro’s decline devalued the central bank’s currency reserves. The exchange-rate-related losses accounted for 11.7 billion francs, while 1.55 billion francs were lost on gold holdings. During the same period last year the SNB lost 2.78 billion francs. All in all, in 2010 its balance sheet contracted by 21 billion francs. During the 15 months through June 2010 the central bank increased its international reserves in 4 times through currency interventions as it was trying to stop excessive appreciation of the national currency. Analysts at Credit Suisse doubt that the SNB will intervene in the coming months unless the franc gains sharply again. Swiss currency gained 9.2% versus the single currency and 17% against the greenback this year.

BNP Paribas: euro zone’s inflation has unexpectedly slowed down According to the data, released today, euro zone's inflation slowed this month from 2.7% in June to 2.5% in July on the annual basis, while economists surveyed by Reuters expected consumer prices to gain 2.7%. As a result, the possibility of the rate hike in the euro area has decreased. The European Central Bank got more room for manoeuvre: now it has reasons to pause the tightening cycle due to the signs of the economic slowdown in the region and the elevated risks related to the debt problems both in Europe and in the United States. The ECB’s mandate is to keep inflation slightly below 2%. The central bank lifted up the benchmark rate twice this year to 1.5%. Today’s data were quite surprising taking into account that German’s CPI growth rate reached in July the 3-month maximum of 2.4%. Analysts at BNP Paribas claim that the main reason of inflation’s slowdown may be the changes in Eurostat's methodology in January when the list of factors regarded as seasonal was enlarged. Economists at IHS Global Insight, the world's largest economics organization, believe that though interest rate hike in the fourth quarter is very possible the slowing European growth and debt issues will force the ECB to keep the rates on hold. It may also turn out that the second round inflationary effects from higher energy and commodity prices are being contained. The specialists project that the ECB will keep rates at 1.5% through the rest of 2011 and then lift them gradually to 2.25% by the end of 2012.

BarCap: comments on the situation in the US Analysts at Barclays Capital note that situation at the FX market is going to be more complicated than the one at the stock market. While in case of the worst outcome in the US equities just pick up the bad news, the currency markets will face 2 impacts: the big negative shock to the US in particular and the global risk shock. The former to some extent offsets the latter when it comes to the overall influence on US dollar. The bank still thinks that the liquidity of American market and the dollar’s safe haven status will play its role. The specialists believe that US authorities will reach a short-term deal before August 2 as it’s impossible to find long-term solutions ahead of that. The long-term deal is very important though, firstly, because of the potential S&P downgrade and, secondly, as this is a very serious issue and if US doesn’t get its fiscal house in order, the global economy will suffer. BarCap says that further out on the time horizon, fiscal tightening will weigh on growth and weaken US currency as the Fed’s monetary policy will remain looser for longer than the market is currently expecting. According to the bank, Barack Obama and the Congress speaker John Boehner aren’t willing to compromise now putting the decision off to the last moments as each of them hopes that the other will back down fist. The economists believe that it’s not the time to get too risky and adventurous at the forex market. Barclays Capital says that at the moment the most attractive currency is yen as it allows enjoying the classic risk-off trade.

Lloyds: USD/JPY may test 76.00 yen Japanese yen keep strengthening versus the greenback and the single currency. The pair USD/JPY is under negative pressure as it seems that Japan’s monetary authorities won’t intervene before the uncertainty associated with US debt debates clears up. The deadline on the matter scheduled on August 2 is approaching. Dollar fell to 77.45 yen, the lowest level since March 17 when it hit the postwar minimum at 76.25 yen. Strategists at Ueda Harlow say that there seems to be no end of the debt ceiling discussion in America. In their view, the risk sentiment will keep worsening, so it’s necessary to buy Swiss franc and Japanese yen. Analysts at Lloyds believe that yen is likely to gain more and even test 76.00 yen per dollar.