FOPLADE- Análisis Financiero.

USD FIRMER ON NEWS FROM CHINA
-China increased its reserve requirement ratio and sold bills at higher yields today.
-Knee-jerk reaction to PBoC is weaker commodity currencies, but med-term positive.
-Options show market sentiment towards EUR improving despite negative media.
-UK’s Europe Minister suggests that the British election will be set for May 6th.

FX Market Update

The USD has gained back some lost ground as commodities and equities are weak as we enter the North American session.
• The USD was given a lift by developments in China. For the second time in as many weeks, China sold bills at higher yields today and for the first time since June 2008 the PBoC increased the bank’s reserve requirement ratio by 0.5%, increasing speculation that higher rates are imminent. The knee-jerk reaction will be negative for commodity currencies as traders worry about a central bank imposed slowing of the Chinese economy weighing on the global recovery. However, in the medium-term we think it will help to avoid an escalation of a Chinese bubble and could help to smooth the recovery; which in turn would be a medium-term positive for commodity currencies.
• Earnings, with Alcoa kicking off the season yesterday with a disappointing release, will be an important market driver this week. Intel is set to release on Thursday and JPMorgan on Friday.
• The DXY has dropped 2% since reaching its recent 78.45 high on December 22nd. It is now trading between its 100 and 200-day moving averages (76.50 and 78.81, respectively). In the current environment monetary policy is a key driver of currency markets; accordingly, the recent drop in the 2-year yield (see chart) has been an important catalyst for USD weakness. Markets are now fully pricing in the first Fed interest rate hike by the fall, which we think is reasonable. Any change to these expectations will cause further volatility in the USD.
• The US curve continues to be at the steepest level in over 30-years (see middle chart); as the 2-year is yielding 0.91 and the 10-year is yielding 3.76 today. The initial steepening of the yield curve was driven by a jump in the long end, which reflected opposing factors: an economic recovery becoming more entrenched as well as the increasing yield demands imposed by those willing to buy US paper. The impact for the USD is mixed and depends on which factor is really driving the steepness. If it is more weighted towards the economic recovery then it is a USD positive as the combination of a firming fundamental base combined with Fed interest rate hikes are bullish. However if the steepness is more weighted towards investors demanding higher yields, it is a USD negative as it highlights the importance of the US fiscal position to investors. The more recent move higher in the curve has been driven by the short-end, with the 2-year dropping from its December high of 1.21 down to 0.91 today. This reflects the changing outlook for the Fed and policy tightening. We think monetary policy expectations will continue to dominate currency trading this year and we hold a generally bearish USD outlook.
• Today it is expected that the US releases a worsening trade balance (see top chart), with consensus calling for -$34.6b deficit. There are no Fed speakers until after the close when Fisher and Plosser will each speak. C.S.

Americas

USDCAD (1.0351) • On a year-to-date basis commodity currencies are outperforming, with a similar pattern to 2009 - AUD leading the pack, followed by NOK, then NZD and finally CAD. The fundamentals in Canada are strong, even though last Friday’s job report was disappointing. Yesterday’s BoC survey were fairly optimistic and highlighted an improving credit environment. News from China today will weigh on CAD; however we continue to believe that the long-term fundamentals are strong and that USDCAD will sustainably reach parity this year. • Technically, for the bearish USDCAD outlook to remain in place, it will need to break back below 1.0253 and test the 1.0207 October low. Resistance lies at the 9-day moving average of 1.0393. C.S.

Europe

EURUSD (1.4479) • EURUSD is trading weaker as the euro has struggled to hold in positive territory after brief attempts higher today. Regardless, we are seeing sentiment recover for EUR as speculative positioning has shown that longs have begun to reenter the market despite the fact that gross shorts continue to increase. Risk-reversals in the options market have also shown a very sharp recovery in EURUSD sentiment as the cost of EURUSD puts over and above that of EURUSD calls has declined significantly as 2010 has gotten under way (see chart). An easing in the cost of downside EUR protection against the USD speaks to the shifting in shorter term risk perceptions for the currency. We saw a close above 1.45 in EURUSD yesterday, a bullish sign, though the pair has struggled with holding above that level today. Technical indicators still look favourable for EURUSD, though it seems that the next couple of sessions are “make or break” if EUR is to recover upside momentum and trade sustainably away from last week’s range. S.T.
GBPUSD (1.6149) • Sterling is one of the better performing majors, up 0.2% against the greenback. The British trade balance improved in November as the deficit shrunk on the highest level of exports in over a year. This certainly reflects the lower relative cost of British goods as sterling has lagged most other non-USD majors since the first quarter of 2009, but also factors related to the recovery in global trade. Additionally, the UK’s Europe Minister Chris Bryant has suggested that the British government will hold the election on May 6th, though this has yet to be officially confirmed. S.T.

Asia / Oceania

USDJPY (91.59) • The yen is the strongest major, up 0.5% against the USD. However, Moody’s has raised focus on what they view as the risk surrounding the Finance Ministry’s change in leadership, saying that it does not engender confidence that the country will be able to muster a credible fiscal strategy needed to stabilize “the massive government debt overhang in the medium term.” USDJPY has moved lower over the past three sessions after failing to hold on to ground above its 200-day moving average, keeping the long term downtrend off of the 2007 high (at 94.20 today) safe for now. The Japanese December Eco Watchers Survey showed future sentiment amongst service sector workers in the country rebounding somewhat after plunging in the previous month, though still remaining below June highs. S.T.
USDCNY (6.8271) • China has executed a T-Bill sale at a higher yield for the second consecutive week, and increased the reserve requirement ratio for banks by 50 basis points, suggesting that the country has now embarked on efforts to tighten monetary policy. These actions are stoking suspicion that China may resume yuan appreciation. The 12-month USDCNY NDF has dropped more than 0.6% over the course of January and is now pricing in an implied 3% appreciation in the CNY versus the USD over the next year. S.T.
AUDUSD (0.9234) • AUD is under pressure today as the market’s knee jerk reaction to the news of the increase in the reserve requirement ratio for Chinese banks has been to sell AUD as it would imply a tightening of monetary conditions by Chinese authorities in an effort to cool domestic demand in Australia’s key export market. This combined with a generally weak profile on economically sensitive commodities like copper and oil today is pressuring currencies like AUD, NZD and NOK. AUDUSD support comes in just above the 0.9200 level, and trend support for AUDUSD off of the December 23rd low holds around 0.9110. S.T.

Suggested Reading

Recovery Imbalance: A Widening Trade Gap, Kelly Evans, WSJ (January 12, 2010) Global Imbalances and the Crisis, David Backus & Thomas Cooley, WSJ (January 12, 2010) Rate Rise Fears Spark Rush to Issue Bonds, Jennifer Huges & Aline Van Duyn, FT (January 12, 2010) Weak States Threaten Euro Stability, says Rehn, Joshua Chaffin, FT (January 12, 2010)




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The Plaza Futures Group



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