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Morgan Stanley: nations will keep diversifying reserves from USD Analysts at Morgan Stanley note that although Standard &Poor's worsened the outlook for US sovereign debt rating, it hasn’t so far affected the greenback’s dynamic. In the longer term, however, S&P's move will encourage the world’s nations to diversify their foreign exchange reserves away from dollars. The specialists underline that that any concrete action of rating agencies may trigger faster reallocation away from the US currency. In the near-term the market’s attention will be focused on the next week's FOMC meeting, though it’s useless to wait for the hints on of when the policy tightening is finally going to start. The bank also says that dollar will remain a funding currency until the Fed begins quitting its extraordinarily loose monetary policy.

Mizuho, Okasan expect USD/JPY to move down Analysts at Mizuho Corporate Bank expect the greenback to lose grounds to Japanese yen as soon as the next week. In their view, the market will once again start talking about the potential intervention of Japan’s Ministry of Finance. The specialists say that US dollar bulls will be disappointed after the FOMC meeting scheduled on Tuesday-Wednesday. Taking into account rather modest US recent economic data it’s possible to assume that the Fed’s Chairman Ban Bernanke may sound rather dovish, so US monetary authorities will likely refrain from tightening during the rest of the year. So, the pair USD/JPY may fall to 80.00, believes Mizuho. Strategists at Okasan Securities believe that USD/JPY may fall below 81.00 in the near term as many investors may get rid of their long positions on USD ahead of the Easter weekend as there's some risk that China will let yuan appreciate against the greenback in order to stem rising inflation. According to Okasan Securities, weaker USD/CNY will put US dollar under pressure against versus currencies.

Westpac: US dollar will keep declining Currency strategists at Westpac claim that there are enough reasons for the greenback to be weak versus other major currencies. In their view, US dollar’s rate is so low because the Federal Reserve is keeping the borrowing costs at the record minimum of 0-0.25% while other world’s central banks tend to hike the interest rates. The specialists say that although the news that Standard & Poor’s put US credit rating on negative watch didn’t derail the nation’s bond market, American currency was broadly weakened. The Dollar Index, which tracks the greenback against 6 major US trading partners, fell to 73.735, the weakest level since August 2008. US dollar fell to record minimum against Aussie and multiyear lows versus at least five other currencies. Westpac forecasts that dollar will drop to $1.50 per euro, 80 yen and the low-90s Canadian cents.

Roubini: comments about US debt and deficit Nouriel Roubini, professor of economics at New York University famous for predicting 2008 global crisis, says that US current fiscal balance can be restored easily and fast enough, as federal, state, and local revenues as a percentage of GDP are still relatively low. As a result, the effect of fiscal tightening would be quite impressive. To deal with the accumulated deficits that form the public debt will be, however, much more difficult and require strong political will, so America will be able to start serious fiscal reforms only after the 2013 elections. Commenting on the S&P’s recent outlook downgrade for the Unites States, the economist claimed that it’s not easy to agitate such bond market as the American one because the nation is still regarded as the safest investment destination in the world. According to Roubini, unlike other indebted countries, the United States benefits from risk aversion, even at the domestic market, through a stronger dollar and lower bond yields.

Commerzbank: negative outlook for USD/CHF US dollar tried to recover versus Swiss franc in the first part of the week but failed in the 0.9000 resistance area. Then the pair USD/CHF renewed the record minimum falling below the previous absolute low at 0.8884 hit on March 16 to 0.8810. Technical analysts at Commerzbank say that the pair’s rate fell due to the broad weakness of American currency. In their view, the greenback is likely to fall to the base of the 5-month downtrend channel at 0.8730. According to the bank, any attempts of the bulls to improve the current state of things will be limited by 0.9017 and 0.9167 (2-month downtrend). As long as USD/CHF is trading below these levels, the outlook for it will remain negative.

Rabobank: market underestimates debt risk in US and Japan Strategists at Rabobank International believe that the financial markets underestimate the degree of the sovereign-debt crises risk in the United States and Japan. Bloomberg cites the Rabobank’s sovereign vulnerability index in comparison with the ranking based on the credit-default swaps: CDS Spread Ranking Rabobank Index Greece 1 1 Japan 7 2 Portugal 3 3 Ireland 2 4 U.S. 11 5 Italy 6 6 Spain 4 7 Belgium 5 8 France 9 9 U.K. 12 10 Austria 8 11 Netherlands 10 12 Australia 12 13 Germany 13 14 Finland 15 15 Denmark 17 16 Switzerland 14 17 Sweden 18 18 It’s easy to see that Rabobank regards Japan as the second most vulnerable economy after Greece that’s not surprising taking into account the fact that the country’s external debt accounts for more that 200% of its GDP. The market, however, puts the Asian nation only at the seventh place as the second position is occupied by Ireland which is followed by other euro zone members – Portugal, Spain and Belgium. According to the bank, large structural deficit of the United States makes it riskier than Spain and Italy. The analysts think investors should be less concerned about the situation in Europe. It’s necessary to note that Rabobank index is based on eight indicators: interest-growth differential, cyclically-adjusted primary budget balance, interest payments, and weighted average years to maturity, net public debt, external debt, current account balance and World Bank governance indicator.

RBC: assumptions on Greek debt restructuring Analysts at Royal Bank of Canada claim that Greek debt restructuring would most likely consist of maturity extensions and the coupon payments’ reductions. In their view, the primary goal of this process will be to reduce redemptions in 2013-2016 to less than 10 billion euro a year. In order to accomplish that the country will need the agreement of the International Monetary Fund, the European Union and European Central Bank that hold around 28% of outstanding Greek debt. According to RBC, the unilateral forced restructuring by Greek authorities or a negotiated restructuring with significant reductions in principal repayments would be too tough for Greek and European banking systems. The bank specialists believe that Greece’s authorities have to incite the national bank to agree to restructure their debts in return for recapitalization, possibly with the funds provided by the EU. Greece’s 2-year bond yields rose above 20%, while the 10-year yields approached 15%, reports Bloomberg.

Aussie renewed maximums versus the greenback Australian dollar rose to the record maximum versus the greenback above $0.7000. There were many factors that had positive impact on the currency. Firstly, investors’ risk appetite was encouraged by US the advance of stocks. Then the interest rate advantage is still in favor of Australia: the RBA benchmark rate is at 4.75%, while the Fed and the BOJ keep the borrowing costs at the record low, close to zero. In addition, according to the data released today, Australian producer prices added 1.2% (q/q) the first quarter in comparison with the last 3 months of 2010 when they rose only by 0.1%. The country’s Foreign Minister Kevin Rudd claimed yesterday that Australia won’t “manipulate” the national currency ruling out the intervention prospects. The pair AUD/USD gained 16% during the past year due to the high revenues from coal and iron ore exports to China, hurting though such spheres as tourism, manufacturing and education.

Commerzbank: EUR/USD on its way to 1.5145/50 The single currency advanced from the week’s minimums in the 1.4150 area overcoming the key resistance in the 1.4535 area (1995 maximum) and getting above 1.4600. Technical analysts at Commerzbank believe that the pair EUR/USD is on its way to 1.5145/50. If euro manages to close the week above 1.4535, the positive outlook for the currency will be confirmed. Resistance for EUR/USD is provided by the upper border of the 2-month uptrend channel at 1.4660.

Sumitomo: long-term forecast for USD/JPY Analysts at Sumitomo Life Insurance believe that the pair USD/JPY will once again drop below 80 yen in the first quarter of the next year. In their view, currency interventions didn’t put an end to yen’s strengthening. At the same time, the specialists underline that this move will be the final round of the currency’s appreciation. Sumitomo forecasts that during the next few years the greenback will be able to climb to 120 yen. American currency will get support from the US economic rebound and Federal Reserve's policy normalization that, in its turn, will widen the gap between Japanese and US interest rates.

Scotia Capital: dollar still has potential for decline Currency strategists at Scotia Capital note that there are a lot of US dollar bears at the market. The greenback is losing both versus the commodity currencies (Australian dollar reached 29-year maximum above 1.7000) and the safe havens (see the pair USD/CHF that renewed the absolute minimum at 0.8850). The specialists say that the purchasing power parity analysis shows that some major currencies are significantly overbought: Aussie, for instance, is overvalued by 34%, Swiss franc – by 28%, euro – by 22% and the Canadian dollar – by 21%. According to Scotia Capital, this data should with no doubt be taken into account. The analysts note, however, that currencies can trade at overvalued levels during some time, especially taking into account the Fed’s loose monetary policy and Standard & Poor's negative outlook for US debt. As for the short term trade, the relative strength index (RSI) shows that no major currency is overvalued, so investors may keep selling dollar looking for its counterparts to set new highs.

Barclays Capital: comments on EUR/JPY Analysts at Barclays Capital claim that in order to confirm the reversal of the downtrend from April maximum at 123.32 versus Japanese yen the single currency has to close the day above 120.15. The specialists believe that the outlook for the pair EUR/JPY will remain bullish as long as it’s trading above the support area of 115.70/114.70.

UniCredit: Spanish auction was successful Analysts at UniCredit and Rabobank claim that today’s Spanish bond auction was successful enough. The country managed to sell 3.37 billion euro of 2021 and 2024 bonds. Bid-to-cover ratios were above 2 in both maturities, while the yields were slightly lower than secondary market levels. Never the less, Spain’s borrowing costs remain high due to the negative impact of the speculation about potential Greek debt restructuring that fuels concerns about the crisis contagion. The yield on 10-year Greek bonds reached yesterday the record maximum of 14.66%. The yield on the same Spanish securities eased a bit to5.45%.

Loonie rose to maximum since 2007 According to the data, released yesterday, Canada’s inflation rate rose in March to the maximal level since September 2008 of 3.3% after gaining 2.2% in February. As a result, the expectations of the Bank of Canada’s rate hike strengthened. Analysts surveyed by Bloomberg claim that in the third quarter the central bank will lift up rates from the current 1% level to 1.5%. The next BOC policy meeting is scheduled on May 31. According to the BOC, the recent economic activity in Canada has been much stronger than the Bank had anticipated. In addition, it's necessary to note that investors’ demand for quality currencies such as Canadian and Australian dollars is likely to increase as Standard & Poor’s has put US credit rating on the negative watch. The pair USD/CAD fell today to 0.9518, the lowest level since November 2007. Analysts at BMO Capital Markets expect loonie to keep strengthening.

Mizuho: GBP/USD will rise to 1.6425 Technical analysts at Mizuho Corporate Bank note that the pair GBP/USD has bounced from the Kijun-sen (26-day MA) and Senkou Span A (the upper border of the Ichimoku Cloud). The specialists believe that sterling is poised to reach the recent maximums in the 1.6425 area. If this doesn’t happen today, then pound will test high another time during the Easter holiday days when the trading volume is low. The bank points out that a lot of British will be off work during 11 days from Friday. According to Mizuho, it’s necessary to buy British currency at 1.6315 adding to 1.6275. The strategists recommend placing stops well below 1.6200 and taking profit at 1.6400/1.6500.

BayernLB: comments on EUR/CHF Analysts at Zuercher Kantonalbank claim that the single currency has left the uptrend channel trading versus Swiss franc, so it needs to rise above 1.2960 in order to get chance to keep strengthening. If euro succeeds, it will be able to climb to 1.3075. Specialists at BayernLB note, however, that though franc fell to 1.2930 as the investors’ risk aversion eased, it may be hard for the pair EUR/CHF to overcome 1.30 and hold above this taking into account the continuing uncertainty about the euro area’s debt crisis.

Standard Life Investments: ECB too hastened to raise rates Analysts at Standard Life Investments claim that the European Central Bank has lifted up rates too soon as the euro zone nations are struggling with the debt crisis (ECB benchmark rate was increased by 25 basis points on April 7 to 1.25% level as a measure counter inflation that rose to 2.7% in March). In their view, the single currency may fall versus the greenback at least by 16% dropping to the pair value in the $1.20/1.25 area. The economists believe that by the end the downtrend of the pair EUR/USD will become evident. The specialists warn that the ECB’s restrictive monetary policy doesn’t correspond to the region’s financial state that is far from well. According to Standard Life Investments, there’s the risk that the ECB may raise the borrowing costs by more than is justified by the outlook for the economy and inflation, and then be forced to cut rates again.

BNY Mellon: US default is impossible Currency strategists at BNY Mellon claim that the S&P’s decision to reduce US credit outlook to negative was very timely as the country’s debt and deficit have reached critical levels and American policymakers needed some shake-up. The specialists note that dollar managed to gain ground on this news rather than decline as the announcement caused the revises of the myriads of risks and when the market goes risk averse dollar tends to strengthen. Of course, the issue of possible US downgrade has to be considered, but there’s no chance that the United States is ever going to default. In the euro area, on the other hand, this may really happen. The bank says that although US can be downgraded in a couple of years, US represents the best bet in the modern world as it’s the biggest and deepest liquid market. On the other hand, it will be quite difficult to invest in the euro zone, the second largest market, due to the sovereign debt problems. According to BNY Mellon, the US probably doesn’t deserve its AAA status but it wins in the battle for investors compared with the other world. The analysts don’t think that US debt concerns will surpass those of the euro area. It’s necessary to understand that America can always print more money, so the point of default is never going to come. In the short-term of 6-8 months the specialists expect strong dollar as it will be risk-off, but in the longer term, if the solution is to print more cash, the greenback will be weak as it has been during the last decade.

John Taylor: EUR/USD will be rising 3-4 months more John Taylor, chairman and founder of FX Concepts, the world’s largest currency hedge fund, claims that the single currency has another 3 or 4 months to rally versus the greenback. Like many other economists Taylor thinks that euro will continue getting support from the widening interest rate differential as the European Central Bank is expected to keep tightening, while the Federal Reserve will likely stay on hold. The specialist notes that in Europe the Southern nations are in recession, while German economy is powering ahead, so Germany ought to have 5-6% rates, while the Southern Europe needs 0% borrowing costs. According to Taylor, the ECB one-size-fits-all monetary policy is a real problem for the region. Taylor says that the Eastern European currencies – Hungary’s, Romania’s and Turkish – as well as Australian and New Zealand’s dollars will outperform euro.

Sumitomo Mitsui: S&P’s move will affect Japan Currency strategists at Sumitomo Mitsui Banking Corp reminded that Standard & Poor’s had warned in February that it might revise its US outlook and so Monday's move was not really surprising. Sumitomo Mitsui believes that S&P may cut US credit rating in the next 3 months. The analysts claim that S&P’s decision means that there is now a scar on the once impeccable credibility of US bonds and could have negative consequences for Japan. This will inevitably weaken the dollar, and as a result will lead to yen’s appreciation. At the same time strong national currency is the last thing Japan needs now when it seeks funds for massive post-tsunami reconstruction.

Japan’s authorities support Treasuries Japan’s Finance Minister Yoshihiko Noda claimed that despite the fact that Standard & Poor’s decreased the outlook for US’s AAA credit rating to “negative” the country’s authorities keep regarding US debt as an attractive investment destination. According to Noda, Treasuries would still be extremely good-quality securities even if the grade was lowered. Such comments of Japanese officials are logical as Japan is the world’s second-largest holder of US Treasuries after China. In February the nation’s investments in US debt accounted for $890.3 billion. It’s necessary to remember that in January Japan’s rating was cut by S&P to AA-. Japan is the most indebted developed nation with its debt-to-GDP ratio over 200%. As a result, to pay for the economic reconstruction after the devastating earthquake that took place on March 11 the country’s policymakers may be forced to increase taxes.

J.P.Morgan recommends buying AUD/USD Analysts at J.P.Morgan advise investors to buy AUD/USD this week in order to benefit from the inflationary trends. In their view, it’s necessary to go long at 1.02 stopping below 0.99 and targeting 1.07. It’s also recommended to purchase Aussie versus Japanese yen. According to the TD Securities-Melbourne Institute inflation Gauge, Australia’s headline inflation added 3.8% in March on the annual basis after 3.6% growth in the year to February. These figures exceed the Reserve Bank of Australia's (RBA) target band of 2-3%. The official measure of CPI inflation for the first quarter is released on April 27.

Rabobank: yen seems to have enough support Currency strategists at Rabobank note that since the beginning of 2011 there’s strong correlation between the USD/JPY dynamics and the performance of the DJIA. The specialists point out that although the fundamentals hint at weaker yen that will be the case only as long as the market’s risk sentiment is positive. As a result, Japanese yen is going to be supported for now. The pair USD/JPY is staying today within the narrow range. According to the bank, investors have calmed down ahead of the appearance of some new drivers. In addition, the trade volumes will likely ease ahead of the Easter holidays (watch the Holiday schedules).

S&P reduced the outlook for US credit rating Standard & Poor’s changed the outlook for US AAA credit rating to negative that means that the debt of the world’s largest economy may be downgraded. To avoid this undesirable fate American officials have develop a plan to reduce by 2013 budget deficits and the huge national debt that’s complicated by the tensions between the Democrats and the Republicans. The agency estimates the possibility of the US rating reduction during the next 2 years as one-in-three. According to S&P, eventually Congress and the Obama administration are likely to reach agreement. S&P forecasts US debt to reach 84% of GDP by 2013. Obama has proposed to cut cumulative deficits by $4 trillion within 12 years through the combination of spending cuts and tax increases. US Republicans insist on the 10-year term. Analysts at Bank of Tokyo-Mitsubishi UFJ note that the United States still has the strongest, deepest, most-liquid markets in the world, so investors actually have no alternatives. Economists at Goldman Sachs say that it’s common knowledge that US fiscal situation is unsustainable unless a large, multiyear fiscal tightening is implemented. In their view, the S&P report contained nothing new on the matter. All in all, US policymakers got an important warning that they should hurry with developing the shortfall reduction process. As a result, the shift in the credit outlook should be regarded more as an attempt to urge the resolution of internal American problems than the revision the global debt market foundation.

Commerzbank: negative prospects for EUR/USD Technical analysts at Commerzbank note that the European currency has breached its 4-month uptrend versus the greenback. As a result, the near-term outlook for the pair EUR/USD has switched to negative. The specialists believe that the bulls will face today the resistance at 1.4293 and 1.4377. As long as euro trades below 1.4377, it will be poised down to 1.4130 and the March minimum at 1.4021.