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4 Apr 2013
Forex: EUR/USD up and USD/JPY down ahead the ECB and BoJ
FXstreet.com (San Francisco) - A trio of central banks. The EUR/USD trades positive on Wednesday as market was disappointed about the weaker-than expected ADP employment data in the United States. But the single currency didn't have enough punch to broke above the 1.2880 MA 200 days level. Will the central banks provide the needed catalyst to break above this level? Or will the Euro collapsed to the 1.2600 area?
On Thursday, market will have three important central banks meetings, the ECB, the BoE and the BoJ. Market expects the European institutions keep unchanged its policy but regarding the BoJ the risk is bigger. Remembering that BoJ new governor Kuroda will have its first meeting, market has been pricing in measures to weak the yen since November.
Since November, the USD/JPY rose around 750 pips to reach multi-years high at 96.70 on March 12, but fears above the real impact of possible measures from the BoJ have hurt sentiment and the USD/JPY retreated to the current 93.00 area. The BoJ will finally speak on Thursday.
According to Kathy Lien, BK Asset Management analyst, there are three possible scenarios in the BoJ decision. First, "BoJ pull forward open ended APP program," that's mean "bullish for USD/JPY." Second, "increase scope and maturity of their APP program," that's mean "potential for disappointment." And Third, "no major changes to APP program," that would be "bearish for USD/JPY."
Lien also points that "given the high level of expectations that the Japanese government has set, hopefully they haven't set themselves up for disappointment." In this way, "anything short of open ended QE and a major expansion in the scope and duration of asset purchases may not be enough."
"In broad strokes," comments the Capital Market team, "look for the BoJ to officially abandon the odd “banknote rule” which states that the BoJ can’t buy more JGB’s than there are yen-notes in circulation." Capital Market recommends "also look for a move all the way out the JGB curve (BoJ previously limited to 3-year or shorter maturities). Then there is the overall size of the programme – with expectations that the BoJ will increase its monthly purchases to ¥5 trillion or more (that’s the baseline expectation)."
The ECB day after Cyprus, Italy, Spain, Slovenia, France, Portugal, etc...
Scandals on insolvency banks in Cyprus and Italy, more recession in Spain (plus corruption in politicians and even the royal family in a country with above 26% of unemployment) Portugal asking for renegotiate bailout conditions (why not if you are paying more interest than another countries?) and Hollande facing a precarious economic environment. That's Europe.
"The ECB meeting is important as we see how Draghi plays his cards when most of the EU tensions are politically derived," says Capital Market. Draghi will do his best to cheer up "confidence somehow, especially on the solidity of the banking system and discouraging the idea that deposits are at risk."
"The impact of the Cypriot crisis on the FX market was not violent but EUR/USD was trading distinctly lower in the days after the bail-out then in the hours that led up to the deal being signed," points the Rabobank analysts team. Following Cyprus developments, "the concept of banking sector bail-in as an alternative to tax payer support in the event of a banking collapse is now settling into the awareness of Europeans."
In this line, Rabobank analysts "remain sellers of EUR/USD on rallies for now," as "investors has been dealt a strong reminder that the Eurozone crisis is alive and kicking."
What's next for the Euro?
In a recent note, Citi Bank said that "1.2260 is fair value for the euro." The bank points, very clever, that the "outlook for a successful banking union is clouded by the Cyprus bailout." According to Citi, the EUR/USD could fall to 1.2600 in the middle term and the best chance for the euro to outperform is a weak US economic data or "Italy forces through stimulus measures in Europe."
Scotiabank is also bearish on the EUR/USD. Camilla Sutton, Strategist at Scotiabank, expects the ECB to leave the refi rate unchanged in its monthly gathering tomorrow “and that President Draghi sounds vaguely more dovish than his previous press conference (particularly considering weak PMIs and a new record high in the 12% unemployment rate) but that he is slow to turn outright dovish, in turn weighing on the outlook for the Eurozone and EUR. We expect EUR to trend lower this year, closing at 1.25”.
As for the short term and with the bloc currency keeping the buoyancy around 1.2845/50, the cross is up 0.22% at 1.2848 with the next hurdle at 1.2878 (high Apr.2) followed by 1.2890 (MA200d) and then 1.2924 (MA21d). On the downside, a break below 1.2751 (low Mar.27) would open the door to 1.2730 (low Nov.19) and finally 1.2680 (61.8% of 1.2042-1.3711).
On Thursday, market will have three important central banks meetings, the ECB, the BoE and the BoJ. Market expects the European institutions keep unchanged its policy but regarding the BoJ the risk is bigger. Remembering that BoJ new governor Kuroda will have its first meeting, market has been pricing in measures to weak the yen since November.
Since November, the USD/JPY rose around 750 pips to reach multi-years high at 96.70 on March 12, but fears above the real impact of possible measures from the BoJ have hurt sentiment and the USD/JPY retreated to the current 93.00 area. The BoJ will finally speak on Thursday.
According to Kathy Lien, BK Asset Management analyst, there are three possible scenarios in the BoJ decision. First, "BoJ pull forward open ended APP program," that's mean "bullish for USD/JPY." Second, "increase scope and maturity of their APP program," that's mean "potential for disappointment." And Third, "no major changes to APP program," that would be "bearish for USD/JPY."
Lien also points that "given the high level of expectations that the Japanese government has set, hopefully they haven't set themselves up for disappointment." In this way, "anything short of open ended QE and a major expansion in the scope and duration of asset purchases may not be enough."
"In broad strokes," comments the Capital Market team, "look for the BoJ to officially abandon the odd “banknote rule” which states that the BoJ can’t buy more JGB’s than there are yen-notes in circulation." Capital Market recommends "also look for a move all the way out the JGB curve (BoJ previously limited to 3-year or shorter maturities). Then there is the overall size of the programme – with expectations that the BoJ will increase its monthly purchases to ¥5 trillion or more (that’s the baseline expectation)."
The ECB day after Cyprus, Italy, Spain, Slovenia, France, Portugal, etc...
Scandals on insolvency banks in Cyprus and Italy, more recession in Spain (plus corruption in politicians and even the royal family in a country with above 26% of unemployment) Portugal asking for renegotiate bailout conditions (why not if you are paying more interest than another countries?) and Hollande facing a precarious economic environment. That's Europe.
"The ECB meeting is important as we see how Draghi plays his cards when most of the EU tensions are politically derived," says Capital Market. Draghi will do his best to cheer up "confidence somehow, especially on the solidity of the banking system and discouraging the idea that deposits are at risk."
"The impact of the Cypriot crisis on the FX market was not violent but EUR/USD was trading distinctly lower in the days after the bail-out then in the hours that led up to the deal being signed," points the Rabobank analysts team. Following Cyprus developments, "the concept of banking sector bail-in as an alternative to tax payer support in the event of a banking collapse is now settling into the awareness of Europeans."
In this line, Rabobank analysts "remain sellers of EUR/USD on rallies for now," as "investors has been dealt a strong reminder that the Eurozone crisis is alive and kicking."
What's next for the Euro?
In a recent note, Citi Bank said that "1.2260 is fair value for the euro." The bank points, very clever, that the "outlook for a successful banking union is clouded by the Cyprus bailout." According to Citi, the EUR/USD could fall to 1.2600 in the middle term and the best chance for the euro to outperform is a weak US economic data or "Italy forces through stimulus measures in Europe."
Scotiabank is also bearish on the EUR/USD. Camilla Sutton, Strategist at Scotiabank, expects the ECB to leave the refi rate unchanged in its monthly gathering tomorrow “and that President Draghi sounds vaguely more dovish than his previous press conference (particularly considering weak PMIs and a new record high in the 12% unemployment rate) but that he is slow to turn outright dovish, in turn weighing on the outlook for the Eurozone and EUR. We expect EUR to trend lower this year, closing at 1.25”.
As for the short term and with the bloc currency keeping the buoyancy around 1.2845/50, the cross is up 0.22% at 1.2848 with the next hurdle at 1.2878 (high Apr.2) followed by 1.2890 (MA200d) and then 1.2924 (MA21d). On the downside, a break below 1.2751 (low Mar.27) would open the door to 1.2730 (low Nov.19) and finally 1.2680 (61.8% of 1.2042-1.3711).