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ECB KEEPS KEY POLICY RATE ON HOLD...WAIT FOR TRICHET Trichet likely to be peppered by questions on Greece during press conference.
-Australian employment data sends AUDUSD briefly to a two month high.
-NIESR points to expanding UK growth in Q4 at 0.3%.
-Greek PM vows to do whatever it takes to bring budget back within EU limit.
-Fed’s Dudley suggests rates on hold for at least six more months.

FX Market Update

The currency market has pulled back from yesterday’s strong risk seeking trading theme that sent all major currencies up against the USD and JPY. AUD is leading due to strong jobs data, while NZD, NOK and CAD are also seeing some support from better commodity prices over the past two days. The yen is once again weaker, while GBP and EUR are seeing downside pressure after strength in Asia. European equities are gaining following the lead set by Asia, though North American equity futures are looking mixed to down. US short yields bounced higher yesterday (though slightly down today), helping to push USDJPY higher on rate differentials. • The USD index has traded lower for the past four sessions (excluding today) and is risking a move back below its 100-day moving average (currently at 76.47) as the index trades just below 77. We continue to look for the index to resume a slow grind lower with the potential risk of a challenge to the 2008 lows around 70.70. • Though the US’s credit rating seems to be safe for now, the same cannot be said for all constituent states. Yesterday, S&P cut California’s debt rating from A to A- and maintained a negative outlook. • Yesterday we highlighted the rather hawkish remarks by Philadelphia Fed President Plosser. Since then we have heard a speech by New York Fed President Dudley (also an alternate FOMC member this year) who gave quite a differing view. Dudley said that rates are going to stay low for a considerable period of time yet, adding that it could be for at least six months and even suggested one year or two years from now (all dependent on economic developments). He also clashed with Plosser’s view that rates should rise before indicators of slack in the economy (such as unemployment) reverse course, Dudley said that he would need to see an economy vigorous enough to bring the unemployment rate down before he could support a rate increase. Thus the past two days have brought very differing views on US rate increase timing, though from alternate FOMC members which somewhat dulls the impact of the comments. • Yesterday’s Beige Book saw ten out of twelve districts showing evidence of improving economic conditions, an increase from the previous release that showed eight out of twelve improving. However the Beige Book also noted that the labour market remained soft in most districts which should keep wage and price pressures subdued. • The Chinese National Development and Reform Commission released information indicating that house prices in 70 cities across China increased 1.5% m/m and 7.8% y/y, indicating what is already obvious to Chinese policymakers, that the risks posed to the economy by the impact of real estate bubble are growing. This is a prime reason for the recent monetary tightening measures in China and we can expect to see more of these policies executed over the coming months. S.T.

Americas

USDCAD (1.0315) • Canada surged with the afternoon recovery in oil and equities yesterday, closing well below 1.04 and keeping the downtrend in USDCAD well intact as CAD outperformed all major currencies. CAD is currently trading near flat against the USD, keeping it in the upper echelon of performers. There is no economic data until tomorrow’s new motor vehicle sales, leaving CAD subject to USD trends, which on a daily basis remain favourable for the loonie. Intraday support is holding at 1.0290. Look for downtrend resistance to come in a hair below 1.04 today while the market targets the (nearly) three month low at 1.0253 ahead of the 1.0207 level. S.T.

Europe

EURUSD (1.4487) • The ECB kept rates on hold today very much as the market expected. Scotia looks for the ECB to keep rates at current levels until the second quarter, though given economic and monetary developments in the Eurozone the balance of risk is tilted to the central bank staying on hold for longer than that. We will watch President Trichet’s press conference today with a particular focus on his response to questions which are certain to be focused on the current fiscal problems in Greece. The market will look for Mr. Trichet to provide a measure of reassurance regarding the coherence of the Eurozone, however he will be constrained by an unwillingness to transmit the notion that those nations well outside of EU economic compliance limits can always depend on unconditional support. Eurozone industrial production increased by 1% in November and saw a positive revision to the previous month’s contraction (now at -0.3%m/m vs. the previous -0.6%). German producer prices increased by 0.8% m/m, the biggest monthly gain in eight months, however prices were driven by an increase in energy costs rather than strong demand factors. S.T.
GBPUSD (1.6260) • Sterling is trading down 0.1% today following yesterday’s overly enthusiastic reaction to an interview with Bank of England policymaker Andrew Sentance. Cable looks to be at trying to stage a breakout to the topside and return back to the middle of the range (capped just above 1.70) that has held since May of 2009. The topside is currently being held buy GBPUSD’s 100-day moving average at 1.6308 (see graph), though this level has been challenged today . The NIESR’s rolling quarterly GDP estimate for the month of December (see graph) showed a further positive move away from negative territory, implying a Q4 GDP increase of 0.3% (not annualized). S.T.

Asia / Oceania

USDJPY (91.79) • USDJPY is moving higher today, leaving JPY as the worst performing currency for two days in a row as the yen is currently trading down 0.5%. November Japanese machine tool orders (a volatile series) fell 11.3%, the largest monthly decline since November 2008. Still, the 12 month monthly moving average is improving (though now slowly) as it currently sits at -1.7%. S.T.
AUDUSD (0.9287) • The Australian dollar is the best performing major today, up 0.5% against the USD and holding on to its gains as other currencies are pressured heading into the North American day. The market was surprised by a 35.2K increase in December employment as expectations were set for a 10K print, a factor which drove AUDUSD briefly back up to a two month high. Australian short term bonds yields have increased on the news with the two year pushing back to 4.55%, its highest yield in a month. S.T.

Commodities

Oil (79.79) • Crude took a hit yesterday following the release of the weekly DoE oil inventory data which showed inventories building for the second consecutive week. Inventory data has come in higher than market expectations since the last week of December which has helped to restrain crude’s one month surge higher, though it still remains near the highest level in over a year. Crude rebounded in European trading to recapture an $80 handle, however oil is being pressured lower as we head into the North American day. S.T.
Suggested Reading
Chinese property prices spike, Jamil Anderlini, FT (January 14, 2010) S&P Cuts California Debt Rating, AP, WSJ (January 14, 2010) Senate Aims for Bernanke Vote Before Fed Term Ends in January, S. Lanman, J. Rowley, BB (January 14, 2010) Fed Beige Book Shows Modest Gains, Justin Lahart, WSJ (January 14, 2010) Please consider voting for us in Euromoney's FX Poll 2010 between January 14 and February 26, at http://www.euromoney.com/stub.aspx?stubid=92.


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The Plaza Futures Group



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