FOPLADE- Análisis Financiero.

SOVEREIGN RISK BRIEFLY SHAKES EUR
• Currencies trade in tight range except for a weak yen.
.USDCAD’s move lower continues to be supported by strong fundamentals.
.EUR weakens on Stark’s view that the EU won’t save Greece, but then recovers.
.PBoC says they will leave monetary policy loose and the CNY “basically stable”.

FX Market Update

Most currencies today are gaining against the USD though not by a wide margin currently. This does not mean that there hasn’t been some significant volatility however as sovereign risk reared its ugly head once again with some comments from ECB member Stark suggesting that the market should not price in a high probability of EU support for Greece should it require a bailout. This weighed not only on EURUSD, but also caused some volatility in other major pairs.
• A subsequent statement from the People’s Bank of China helped to take a measure of sting out of the risk aversion theme that seemed to be creeping into global markets as the PBoC reiterated its aim to implement appropriately loose monetary policy and maintain the stability of macro policy. The market probably took more confidence in the PBoC pledge to “guide and urge” financial institutions from pursuing risky lending strategies and monitor real estate markets. Interestingly, the PBoC also included a comment on keeping CNY “basically stable” as part of its 2010 strategy, a comment that was absent from the previous November policy statement.
• Currently, the currency market is sitting with small gains by CAD, AUD and NOK while NZD is off mildly and JPY holds as the only currency to be losing ground.
• The reemergence of sovereign risk issues hits closely at a theme that we continue to think will be a crucial factor this year. Asset differentiation amongst investors on structural fundamentals will overtake the general thrust of risk-thirst style asset allocation that dominated so distinctly in 2009. In a year when all governments will see debt burdens rise substantially, the key differentiating factor will be to watch for those with a clear commitment to taper off fiscal stimulus and control deficits to ensure that measures do not bleed into creating worsening structural deficits, particularly for countries already facing pressure on their credit ratings. With the UK going into an election year we see additional risk on the fiscal side, underscored by the fact that large fund managers (highlighted in our recent notes and suggested readings), are beginning to shy away from the debt of countries like the UK and US. • Today we will see some important US data with ADP employment and ISM non-manufacturing coming out (see chart), along with the FoMC minutes from the December 16th meeting. With US short yields still elevated and pricing in more hawkish Fed expectations, we can still expect the balance of risk on the USD reaction to the data to be more “natural” with positive results providing USD support, and vice-versa for negative results. Employment was up in December’s manufacturing ISM read, so it bears watching both ADP and the service sector employment sub index for predictions of Friday’s non-farm data. S.T.

Americas

USDCAD (1.0380) • CAD is up 0.2% against the USD and is performing relatively well today. USDCAD 1-month 25-delta risk reversals continue to shift lower (see chart) as the market increases the relative price premium on USDCAD puts against USDCAD calls, a positive sentiment indicator for CAD. The interesting thing to note about CAD relative to the other commodity currencies (NZD, AUD) is the stability of the loonie’s performance over the past month. In fact, option implied volatility for CAD has set new 1-year lows, whereas AUD and NZD vol is still more elevated. These factors give us confidence in our view that USDCAD is eventually set to test the 1.0207 lows from 2009. Additionally, our short term valuation model (which includes a host of financial market variables) has shown USDCAD trading levels very well in line with fitted estimates since the mid December move lower in the pair, again providing confidence that this move lower is USDCAD in fundamentally supported. S.T.

Europe

EURUSD (1.4365) • EUR has had a volatile session, trading down below 1.43 only to recover back close to yesterday’s close. ECB member Juergen Stark’s comments that “the markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece”, put downward pressure on the currency. We think that the sovereign issues that face the Eurozone are now fairly well priced into the currency and that reactions from here will be more knee-jerk than lasting. However, Martin Wolf (see Suggested Readings) has an interesting comments on the hurdles that lie ahead for the Eurozone, which we think will begin to limit EUR upside late in 2010 and 2011. • Fundamental releases were mixed, with the PMI composite rising to an as expected 54.2; industrial new orders were disappointing, dropping -2.2% m/m; and the Eurozone PPI slipped down to 0.1% m/m. • Technically, the 200-day moving average (1.4244) has provided support over the last few weeks. We think there has been a sea-change in sentiment, but that most of that is now complete, which should leave EUR trading increasingly off fundamentals. We continue to believe that EUR will move higher this quarter. C.S.
GBPUSD (1.5990) • Sterling is entering the North American session essentially where it closed yesterday. • PMI services, an important gage for the MPC, came in as expected at a healthy 56.8. We think the BoE will remain more dovish than the other G7 central banks and that this will weigh on the currency. The BoE is widely expect to leave both interest rates and its asset purchase program on hold tomorrow. • GBP has been unable to mount a rally and continues to trade bearishly below its 200-day moving average of 1.6100. C.S.
USDISK (125.20) • Iceland’s finance minister has reiterated that the government will not default as speculation increases that the international bailout agreement to help Iceland may now be in jeopardy after the presidential veto of the depositor bill. Iceland was an important theme in yesterday’s trading. General sovereign risk will be an important theme in 2010. C.S.

Asia / Oceania

USDJPY (92.50) • USDJPY continues to trade firmly between its 100 and 200-day moving averages (90.61 and 93.53, respectively) and today has reclaimed most of yesterday’s losses. • There has been little reaction to news that the highly experienced Finance Minister Fujii’s health has deteriorated and he will retire and that Deputy Prime Minister Naota Kan will replace him. • The key driver for USDJPY continues to be the 2-year bond yield spread (see bottom chart). The 30-day rolling correlation has risen to 0.93, reflecting the importance of interest rate expectations on USDJPY. Accordingly, Friday’s release of nonfarm payrolls and its impact on Fed interest rate expectations will be a key risk for USDJPY traders. A worse than expected release would most likely create USDJPY selling on the back of expectations for the first Fed interest rate hike being pushed out farther into 2010. C.S.
NZDUSD (0.7325) • NZD was weaker in Asian and European trading due to a drop in milk prices, but has recovered most of its weakness and is now trading just 0.3% below yesterday’s North American close. C.S.

Commodities

Oil (81.70) • Oil struggled with a new high yesterday, but in the end was unable to push above the October $82/barrel oil price. Still oil above $80/barrel is bullish for CAD. C.S.
CRB (289.39) • The CRB index reached a new 14-month high of 290.47 yesterday, pushed higher by the ongoing rally across commodities. This is also bullish for CAD. C.S.

Suggested Reading

EUR Rattled as Stark Says EU Will Not Bail Out Greece, Jamie Chisholm, FT (January 6, 2010) US Slaps More Duties on Chinese Steel Products, Reuters (January 6, 2010) The Eurozone’s Next Decade Will Be Tough, Martin Wolf, FT (January 6, 2010) The Cause of Our Crises Has Not Gone Away, John Kay, FT (January 6, 2010) Britain Threatens to Freeze Iceland Out of the EU as Loan Payback Vetoed, S. Jagger and J. Sherman, Times (January 6, 2010)
Camilla Sutton, CFA, CMT Sacha Tihanyi
Currency Strategist Currency Strategist
Scotia Capital Scotia Capital
416-866-5470 416-862-3154
Camilla_sutton@scotiacapital.com Sacha_tihanyi@scotiacapital.com

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The Plaza Futures Group



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