Euro under pressure of concerns about Portugal

Investors’ attention has returned to Portugal where the parliament votes today on budget cuts, the issue that caused difference in views among the lawmakers.

Analysts at Deutsche Bank say that in the worst case Portuguese government will fail leaving the county without the leading power until April. This would mean, in its turn, that there will be no legitimate government to negotiate EFSF bailout terms. The specialists are sure that the country will be soon forced to ask for the external financial help. In their view, it’s necessary to take into account the high amount of funding Portugal will need in April. The bank points out that there’s the risk of the dangerous situation when the ECB has to buy very aggressively at any auction even though it's not permitted to buy the primary issuance that may fail at auction.

Economists at JPMorgan Chase claim that Prime Minister Jose Socrates tried to reach a compromise with the opposition, but no progress was made. According to the bank, the odds that Portuguese government will fall this week seem to be high.

The yield spread between 2-year Portuguese and German bonds added 20 basis points to 479 bps with Portuguese 2-year paper yielding 6.487%.

Analysts at Mizuho Corporate Bank note that the huge bailout funds don’t resolve the euro zone’s debt problem that has to be treated at the root. In other words, the specialists suggest that the region’s fiscal consolidation will be necessary anyway no matter how much funds the EFSF disposes.

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Buffett: US economy’s improving

Warren Buffett, the head of Berkshire Hathaway, believes that American economy is improving month by month.

US GDP gained 2.8% showing the maximal advance since 2005. The unemployment rate fell from 9.8% in November to 8.9% in February. The Standard & Poor’s 500 Index increased by 3.2% this year after climbing by 13% in 2010 and 23% in 2009, though it’s still about 14% below its level at the end of 2007.

The famous billionaire investor says that although there will be some commercial disruptions due to the Japan’s earthquake, the consequences of the disaster won’t seriously affect US economy and global economy as a whole.

It’s also necessary to note that Buffet expects Japan’s stock market to rise and advised investors buying the nation’s stocks on the dip.

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MIG Bank bets on EUR/USD decline

Technical analysts at MIG Bank advise investors to sell the European currency versus the greenback as it has broken below the March 21 minimum in the 1.4140 area.

The specialists note that if the pair EUR/USD closes the day below this level, short-term bearish bias will be confirmed and euro will be poised for a decline to 1.4085, then to 1.40 and possibly to the previous reaction minimum at 1.3867.

According to the bank, the single currency will be able to resume its way up only if it rises above November 2010 maximum at 1.4282.

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MIG Bank expects USD/JPY to correct downwards

Technical analysts at MIG Bank believe that dollar’s recovery from historic minimum versus yen is showing signs of weakness. In their view, it’s very difficult for the pair USD/JPY to regain the base of the broken triangle in the 81.70 area after it didn’t manage to rise above 82.00.

The specialists expect the greenback to survive downward correction to support levels at March 21 minimum of 80.69 and the psychological level of 80.00. The decisive bearish move may bring American currency to March 18 minimum at 79.07 and test the postwar record minimum at 76.31.

According to the bank, dollar will be able to make the longer-term upside reversal if it overcomes March 18 maximum at 81.99 and then March 11 maximum at 83.30.

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New Zealand will post current account surplus in 2011

According to the data released today, the ratio of New Zealand’s current-account deficit to GDP hit 2.3%, the smallest level since 2001. It happened as the country’s economy grew due to rising milk, meat and lumber exports, as well as reinsurance payments after a magnitude-7 quake that occurred in September. It’s expected that the effects of more damaging February earthquake will push the nation’s current account into surplus this year.

Analysts at RBC Capital Markets believe that the country’s current account will post a surplus of around 1% of GDP in 2010/11 fiscal year on the back of these flows and higher dairy prices. However, New Zealand’s fiscal position will worsen as the government has to fund earthquake-related expenses and there the nation’s credit ratings will be threatened.

New Zealand’s fourth quarter GDP will be published tomorrow. Analysts at Commonwealth Bank of Australia say that investors are ready to the discouraging results and don’t expect much, so kiwi won’t decline much. The specialists say that the market is focused now more on the reconstruction that will certainly contribute to the future expansion of the country’s economy.

Economists surveyed by Bloomberg News expect that New Zealand’s GDP added 0.1% in the final quarter of 2010 after dropping by 0.2% in the third quarter of last year.

The Reserve bank of New Zealand reduced the borrowing costs from 3% to 2.5% on March 10.

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Morgan Stanley about the consequences of Japanese quake

Analysts at Morgan Stanley claim that Japan’s disaster will seriously affect the country’s economy that may contract by 3% this year, while before the temblor the bank was looking forward to 2% growth. In 2012 Japan may either add 3% or lose 1%, it’s hard to make a clear forecast now.

The specialists note, however, that the impact on the world’s economy isn’t going to be very significant. Morgan Stanley expects the earthquake to reduce the global economic growth in 2011 by 0.5 percentage point to 3.8%. The decline of Japan’s GDP may lead to about 0.25-0.5 percentage point, of the estimated cut to 2011 global economic growth, while the rest of the reduction reflects negative effects to other economies through goods and services trade, capital flows, financial system contagion and commodity prices.

According to the economists, the world’s recovery won’t be derailed as conditions were relatively favorable before the crisis and the governments and central banks are ready to increase support for growth if needed.

Among the other risks to the global growth there are surging oil prices stemming from unrest in the Middle East and Northern Africa, monetary tightening in emerging markets to stem rising inflation and contagion from euro zone’s sovereign debt crisis that spreads to the US and other developed nations.

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Barclays Capital: GBP/USD may rise to 1.82 in a year

British pound weakened after yesterday’s release of the Bank of England’s March MPC meeting minutes and the Chancellor of Exchequer George Osborne’s presentation of UK 2011 budget. The pair GBP/USD fell from the March 22 maximum at 1.6400 to 1.6200 today.

Never the less, analysts at Barclays Capital regard sterling’s weakness as temporary and believe that it will eventually rise. The specialists still think that the BoE may raise interest rates already in May as the policymakers will be concerned about inflation staying above the central bank’s target and the country’s first quarter economic growth is likely to be acceptable.

According to Barclays, British currency will rise versus euro and euro will advance against the greenback when the EU summit-related risks are eliminated. As a result, the strategists project GBP/USD to strengthen to 1.82 in a year.

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Euro zone: all attention to Spain and Portugal

Moody’s Investors Service cut the ratings on 30 Spanish banks by at least one step after sovereign downgrade to Aa2. Portuguese Prime Minister Jose Socrates tendered his resignation yesterday after parliament’s rejection of plans to cut the budget, pushing the country closer to an international financial bailout.

Analysts at Royal Bank of Scotland claimed today that euro’s decline versus the greenback won’t last long as Spanish bond yields aren’t rising against benchmark German bunds at the same rate as Portuguese debt does. According to the specialists, if Portuguese Problems don’t spread to Spain, euro’s weakness will be relatively limited.

Analysts at Societe Generale don’t seem so optimistic on the single currency. In their view, Moody's downgrade of Spanish banks, Portugal's failure to accept a more austere budget and the upcoming elections in Germany this weekend, which will harden the German position lead to the squeeze on EUR/USD. In their view, the pair may retest 1.40.

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UK budget 2011: analysis of Osborne’s presentation

Chancellor of the Exchequer George Osborne presented yesterday UK 2011 budget. It’s necessary to note that the plans to conduct the huge fiscal consolidation were left intact, while the coalition government is now emphasizing its intention to stimulate British economic recovery.

Let’s outline some essential points of Osborne’s speech.

Forecasts:

UK GDP is expected to add 1.7% in 2011, down from the previous forecast of 2.1%.
Cuts:

Fuel duty was cut: the tax on gasoline pump prices was lowered by 1 penny a liter, while the planned increase in line with inflation for a year was delayed.
The amount a person can earn without paying tax was increased by 630 pounds ($1,024) to 8,105 pounds that means that most earners will get a 120-pound tax cut.
For households:

10,000 people earning less than 60,000 pounds a year who are buying their first home will get 250 million pounds in interest-free loans.
For corporations:

Corporation tax will be decreased next month by 2 percentage points and then by 1 point cuts in each of the next 3 years. That will take it to 23%, the lowest level in the G7.
How will all these cuts fit in the austerity plan? They are going to be compensated:

Oil production taxes are raised: the supplementary charge on North Sea oil profits went up to from 20% to 32%.
30,000-pound annual charge on people domiciled elsewhere for tax purposes who have lived in the UK for 7 years will rise to 50,000 pounds for those in the country for more than 12 years.
Effects and summary:

Business groups welcomed the budget, saying the measures will help the economy overcome a slump in the fourth quarter of last year.
The household incomes will still be on average about 1.5% worse than in May when Osborne became chancellor. The top and bottom deciles will suffer even more.
So, it’s possible to see that the budget is oriented to the British population. Osborne tried to calm down voters concerned about deficit-reduction plans and a sluggish economy with money taken from oil companies, banks and the wealthy as he didn’t give up the plan to reduce the government’s expenditure. UK authorities made an attempt to find a compromise between the necessity to encourage the voters’ economic confidence and the need not to disappoint investors who want the deficit to be eliminated.

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Analysts on the prospects of BoE rate hike

The pair GBP/USD keeps going down after British Chancellor of the Exchequer George Osborne presented the country’s 2011 budget. Pound went down from March 22 maximum at 1.6400 getting today below 1.6200.

The analysts have different opinions on the prospects of bank of England’s rate hikes.

Specialists at Brown Brothers Harriman underline that British authorities increased yesterday the borrowings forecast, while reducing the estimate of 2011 GDP growth from 2.1% to 1.7%. The analysts remind that the austerity plan is based on low rates. As a result, BBH believes that British central bank will have to keep the rates unchanged and that bearish pressure on sterling will strengthen. According to the bank, investors will soon realize that their expectations are exaggerated and pound will drop to $1.60.

BNP Paribas, on the contrary, thinks that the Bank of England will take into account mainly the inflation level that reached 4.4% in February. The MPC member Andrew Sentence notes that inflation may overcome 5% level this year. The analysts think that the UK central bank will be forced to raise its inflation forecast and note that the possibility of potential rate hike in May has augmented.

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