FOPLADE- Análisis Financiero.

USD WEAKER, AS GBP LEADS THE MAJORS
-Fed’s Plosser says rates must increase before unemployment falls.
-Market will look for further US economic improvement in Beige Book release.
-EUR’s rally amidst suspicions over the quality of Greece’s financial reports is bullish.
-Sentance implies that the MPC might adopt a ‘wait and see’ approach.

FX Market Update

The USD has trended weaker through the Asian and European sessions. Though showing some temporary strength against the euro, the dollar index is now trading lower for the fourth session in a row. Most currencies are gaining against the USD, with GBP, NOK, SEK and EUR leading while JPY loses some ground after yesterday’s very strong gain. Surprisingly, commodities are not showing a great deal of upside buoyancy with oil off and a lack of upside momentum in natural gas and copper, while equities look mixed. The two year US government Treasury is weaker today, helping the yield hold above 0.9%, a move that is being mimicked across the government bond curve.
• Philadelphia Federal Reserve President Charles Plosser (an alternate voting member in 2010) gave a speech yesterday on the US economic outlook, and suggested that “interest rates must increase well before the unemployment rate or other measures of resource slack have diminished to acceptable levels.” These comments dovetail nicely with an article in the Wall Street Journal today (see readings: “Bernanke Challenged on Rates’ Role in Bust”) and directly suggests that, contrary to Fed Chairman Bernanke’s speech, low real rates for too long a period risks causing inflation later on in the business cycle. Given Plosser’s alternate voting status this year (less weigh than a voting member), markets are given nothing more than a hawkish view on the Fed outlook but are reminded that there is an ongoing debate inside the Fed. Given the current upwards trajectory in nonfarm data (smaller losses) look for the USD to be better supported by rates on the short end and less subject to the risk-on/risk-off trading patterns so prominent in 2009.
• Today the Fed’s Beige Book will be released providing the market with an anecdotal read on the US economy. In the December release, the Beige Book noted that economic conditions had generally improved modestly since the last report with 8 out of 12 Fed districts reporting an improvement in economic conditions while Cleveland, Richmond, Philadelphia and Atlanta reported stagnant or mixed developments. Any significant improvement would be mildly bullish for the USD in the current trading environment. S.T.

Americas

USDCAD (1.0350) • CAD is performing better than yesterday, currently up 0.5% against the USD but USDCAD is still trading above yesterday’s intraday low. CAD’s short term fundamental drivers are moving against it today as oil is testing back below the $80 level and the US-Canada 2-year interest rate spread is displaying a continuing lack of support for CAD. Though short rate differentials have been a key driver of the USD over the past 1.5 months, the spread between Canada and the US seems to have been less of a driver on a daily basis as the direction in USDCAD and US-Canada 2-year rates have moved in opposite directions (see graph). The rolling 1-month correlation between the two had fallen to near 0 by the end of November and into negative territory through mid December (currently at -0.75). The lack of rate support, the weakness in oil and a lack of further improvement in the risk skew in the options market over the past week is leading our short term USDCAD model to indicate a very slight (but as of yet within the margin of error) overvaluation in CAD. However, we still remain short term bullish the currency against the USD outside of a major meltdown in crude and general USD strength, particularly as CAD has underperformed other major commodity currencies (like AUD and NZD) that arguably have much more positivity priced into them currently. We look for a close below 1.04 in the pair to keep downside momentum well in play. S.T.

Europe

EURUSD (1.4560) • EUR has gained 0.5% against the USD as we move into the North American session. • Germany’s budget deficit came in better than expected but annual growth dropped 5%, while France’s CPI came in above expectations. Accordingly, the data today has been fairly mixed. • News from Greece continues to deteriorate. The European Commission’s report on Greece highlights concerning irregularities in the data the country submits to the EU. Essentially the quality of Greece’s numbers are widely suspect, which implies that information on their deficit and financial situation is likely worse than currently thought. • EUR’s ability to rally in the midst of this indicates that a lot of sovereign risk is already priced in. We think the outlook for EUR is volatile, but that over the next few months it will be capable of sustaining a rally. • Technicals for EUR are relatively strong as a buy signal has been generated from its MACD, the 9-day has crossed above the 21-day moving average (1.4417 and 1.4381, respectively); and the candlestick pattern displays a bottoming and is now attempting to rally. Today’s push above Friday’s high of 1.4557 highlights momentum behind EUR upside. We are biased to be long EUR on both a short and medium-term horizon and hold a Q110 quarter-end forecast of 1.50. C.S.
GBPUSD (1.6275) • Sterling is outperforming today as comments from the BoE’s Sentance in the Guardian are taken as hawkish (see Suggested Reading). We would argue that the comments are actually more neutral as he said things like “If the MPC comes to the decision that it doesn't want to add to the monetary stimulus it doesn't mean it is going to tighten. There could be 'wait and see' while the recovery gathers momentum”. We expect the BoE to remain fairly dovish this year, not entering a hiking cycle until Q410. We expect that this will leave GBP as a mid-performer, underperforming both CAD and EUR. • Today, industrial production came in slightly above expectations at 0.4% m/m and manufacturing production disappointed, coming in flat m/m. C.S.

Asia / Oceania

USDJPY (91.35) • USDJPY is trading within yesterday’s range, but has reversed some of the downside. There were no major releases from Japan today. • As the middle chart on page 1 highlights, USDJPY and the 2-year bond yield spread continue to move in sync. Over the last few sessions USDJPY has dropped lower as US short-yields have dropped and Japanese yields have held relatively stable. The current rolling 30-day correlation between USDJPY and the 2-year yield spread stands at 0.89. while the 60-day is at 0.86. The sensitivity highlights the importance of monetary policy on the currency, with any adjustment to Fed expectations having a major influence on USDJPY. Support comes in at the 100-day moving average of 90.50, while resistance comes in at yesterday’s open of 92.09. C.S.

Commodities

Oil (79.90) • Oil’s drop back below $80/barrel is disappointing for bulls, however the ability of the commodity to reach a new 14-month high of 83.95 last week keeps the medium-term outlook bullish. Yesterday’s increase in China’s reserve ratio put downward pressure on oil, but we continue to believe that the nature of the global recovery will be positive for oil in 2010. Scotia Economics holds an average 2010 oil price forecast of $90/barrel. C.S.

Suggested Reading

Inflation Lurks in Wings as Recovery Gets Going, Warns MPC Member, Larry Elliott, Guardian (January 13, 2010) China Hits Brakes on Economic Stimulus, James Areddy, WSJ (January 13, 2010) Even if Beige Book is Bullish, the Fed Isn’t, Kelly Evans, WSJ (January 13, 2010) Greece Condemned for Falsifying Data, FT (January 13, 2010) Bernanke Challenged on Rates’ Role in Bust, Hon Hilsenrath, WSJ (January 13, 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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