FOPLADE-Análisis Financiero.

QUIET MARKETS ON US HOLIDAY

-US holiday, but markets starting off week on positive footing.
-CFTC data: short EUR positions are cut in half and CAD longs increase.
-China will release their December economic stats on Wednesday after NYC close.
-BoC tomorrow; we do not expect additional commentary over CAD strength.

FX Market Update

• The US market is closed for Martin Luther King Day, however global markets are on a positive footing. Equities are strong, oil is back above $78/barrel and the USD is generally weaker. There have been no major developments over the weekend and focus this morning is on the EU finance minister’s meeting, earnings and the general market sentiment that it is too early to cut global stimulus, which should reward investors in risk seeking territory.
• G7 currency volatility (see middle chart) has had a noticeable decline, and a more rapid drop than equity vol as measured through the VIX. This reflects investor sentiment that is increasingly comfortable with FX valuations and hints that some currencies might be range bound for the near-term. The other implication is that low volatility is one of the important fundamentals that the carry trade relies on. Accordingly, with G7 vol now sitting below 12, the lowest levels in 16-months, there is increasing appetite from carry trade players. The lowest yielding currencies continue to be the JPY and USD. The resurrection of carry puts downward pressure on both of these.
• The CFTC speculative positioning data underwent a significant change last week. USD bulls lost their conviction and many who had held aggressive long positions began to pare back their exposure to the USD - see top chart. The most notable change came against EUR, where the net short EUR position was cut in half and now stands at $3.2bn. The other noticeable development in the data (and this has been an ongoing theme over the last several weeks) was the bullish sentiment towards commodity currencies. This is inline with our expected 2010 currency return pattern, where we have commodity currencies outperforming.
• Recently we have seen an increasing preference to play commodity currencies against each other on a relative basis. We think there is value in this approach (and prefer the AUD for near-term traders, but CAD for medium term strategies), but still think there is value in holding long AUD and CAD positions against both the USD and EUR. With global bodies supporting growth at any cost and the Fed still several months, if not quarters, away from the first interest rate hike, we expect further upside in commodity currencies.
• Returns on a year-to-date basis highlight what we think will be the pattern for Q110. Commodity currencies have outperformed, with AUD having gained 3.2%, CAD having gained 2.6% and NOK and NZD up 2.2%, while EUR and the USD have underperformed noticeably. C.S.

Americas

USDCAD (1.0275) • CAD is trading very close to Friday’s close and well within last week’s 1.0225 - 1.0414 range. Last week was an interesting one as fundamentals were mixed drivers for USDCAD. Oil dropped -5.7%, the DXY (USD index) was flat, 2-year bond spreads moved against USDCAD and sentiment remained noticeably bearish. USDCAD closed the week down just 0.01% (at 1.0291), but at the bottom end of its multi-month range. We continue to believe that investor sentiment and fundamentals will be supportive of a break below the October 1.0207 low.
• Tomorrow the Bank of Canada (BoC) meets and is universally expected to leave interest rates on hold at 0.25%. We expect the tone of the statement to have improved since their December 8th meeting, but for Governor Carney to continue to sound dovish. We do not expect any major changes to their commentary regarding CAD. On December 7th (the day leading into the last meeting), USDCAD closed at 1.0513, just 2% above current levels; in addition in the MPR the BoC used 1.04 for forecasting purposes. Accordingly, we believe USDCAD is roughly in line with the BoC’s expectations. In addition, much of the strength in CAD during 2009 was due to Type 2 factors - namely broad based USD weakness; however we would argue that recent strength is Type 1 - reflecting changes in aggregate demand for Canadian goods and services. The BoC has made it very clear that there is less of a need for monetary policy to respond to Type 1 movements. Accordingly, we do not expect the BoC to increase the strength of their commentary over CAD strength, which should prove positive for CAD bulls. C.S.

Europe

EURUSD (1.4375) • EUR is underperforming today, but is entering the North American session essentially where it closed on Friday. Today the EU finance ministers are meeting and accordingly there could be further headlines about Greece and the weaker sovereigns. All in all, with think EUR has held in well considering the negative developments from Greece. There was no major data released today, but tomorrow’s ZEW will provide an update on economic sentiment for markets. • The most important development last week was ECB President Trichet’s press conference, which was fairly balanced. He reiterated the importance of a strong USD, noted that there are significant hurdles that face the EU and that inflation pressures seem balanced. However, his tone was far from optimistic and his comments made it clear that the ECB is in no rush to increase interest rates. • Technically, EUR’s 200-day moving average (1.4288) has provided solid support. A drop below here would be bearish. Resistance lies at congestion of 1.4440. C.S.

Asia / Oceania

USDJPY (90.75) • The yen is flat as we move into the North American open. • Industrial production came in below the previous release at 2.2% m/m and -4.2% y/y; however the BoJ did raise its economic assessment in almost half of the country’s regions. Governor Shirakawa said that Japan’s economy is picking up but that the BoJ will keep ‘extremely accommodative policy’ in place. • The unfolding Japanese political funding scandal, where the DPJ’s secretary general has been arrested, has yet to cause any significant pressure on yen. C.S.
AUDUSD (0.9265) • Providing a lift to the currency and expectations for further interest rate increases by the RBA, Australian inflation increased 0.3% m/m and 2.6% y/y in December. The increase in inflation hints that as the economy continues to strengthen there might be ongoing pressures on inflation, which should keep the RBA sounding relatively hawkish. C.S.
USDCNY (6.8268) • One of the most important market drivers is the pace and strength of the global economic recovery. Accordingly, developments in China’s economy, a major part of the global growth engine, weigh on markets. Early in Thursday’s Asian session (after the Wednesday North American close) China is expected to release its December economic releases. This will include Q4 growth, expected to come in at 10.5% y/y, CPI, retail sales and industrial production. C.S.

Commodities

Oil (78.40) • Oil is beginning the week on positive footing as Qatar’s energy minister commented that OPEC most likely won’t raise output in 2010. Accordingly, the 50-day moving average (77.13) has held as support and oil is now trading back over 78.00/barrel. This is positive for CAD. Currently, the 45-day rolling correlation between oil prices and CAD stands at 0.67. C.S.
Gold (1135.72) • Gold is firmer today, and continues to trade either side of its 50-day moving average of 1134.54. C.S.

Suggested Reading

Digging out of Debt: The Rich World’s Debt Reduction has Barely Begun, The Economist (January 14, 2010) A Greek Crisis May Well Become Germany’s Problem, Bronwen Maddox, The Times (January 18, 2010) Ominous Lessons of the 1930s Europe, Paul De Grauwe, FT (January 18, 2010) European Banks Tap US Market in Refinancing Drive, Alex Chambers and Jane Merriman, Reuters (January 18, 2010) Carney Enters Crucial Phase for Recovery, Jeremy Torobin, The G&M (January 18, 2010)

Please consider voting for us in Euromoney's FX Poll 2010 between January 14 and February 26. The link can be found at http://www.euromoney.com/stub.aspx?stubid=92.
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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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