FOPLADE- Análisis Financiero.

CHINA, REPUBLIC WIN & TECHNICALS PUSH USD HIGHER USDCAD higher on weak inflation release and a broadly stronger USD.
-Republican senate win in Massachusetts puts healthcare reforms in doubt.
-EURUSD break of the 200-day moving average accelerates USD strength.
-Tighter lending policy in China drives fears of slower growth into markets.

FX Market Update

The USD is broadly stronger today. The return pattern isn’t that noteworthy, with most currencies having lost between 0.5 and 1%; however several currencies have broken through or are testing important levels, which is adding momentum to USD strength. EUR has dropped violently below its 200-day moving average of 1.4298, GBP is struggling to stay above both its 50 and 100-day moving average (1.6312 and 1.6311, respectively), AUD is flirting with a break below its 50-day moving average of 0.9119, while USDCAD has broken above its 21-day moving average of 1.0393. This implies that there could be an important shift taking place in currencies and adds importance to today’s closing levels.
• Developments in China, where the chief banking regulator has said that some banks have been asked to cut lending for the rest of January are weighing on markets and providing a boost to the USD. The impact of tighter policy in China sends fears of slower growth throughout the market, but in the medium term we think it will help to stabilize growth and avoid the shock of a sudden popping of an asset bubble. Today the Shanghai index fell by 3% and the negative tone has been carried through the European session and into the North American open. • An upbeat report from IBM is doing little to offset weakness in the financial sectors. Earnings will continue to be an important driver today.
• Chances of President Obama’s healthcare reforms being passed are facing a major setback as Republican Brown has won the Massachusetts’ Senate seat. This will have an impact on the fiscal outlook for the US and accordingly the USD.
• Yesterday’s release of November TIC data proved interesting. Net long-term inflows jumped up to $126.8b as total net TIC flows increased by $26.6b. However China’s holding of US Treasurys dropped (see middle chart) during November, even as their reserves grew by $61 billion. The TIC data is volatile and one release doesn’t create a trend; however as the US deficit becomes a key weight for the USD, the details behind the TIC data will become increasingly important.
• Today, there is a slew of US data including PPI, housing starts and building permits. C.S.

Americas

USDCAD (1.0383) • Today USDCAD has drifted higher as the USD is broadly firmer. • Today’s CPI release was softer than expected, providing reassurance that inflation in Canada is well contained. • Yesterday’s statement by the Bank of Canada was very similar to December’s. Highlighting an improving global economy that is still reliant on fiscal and monetary stimulus and a relatively strong growth outlook for Canada as inflation remains contained. They also noted the strength in CAD as a key risk going forward as it dampens the outlook for growth and weighs on inflation. We do not think today’s run-up in USDCAD is a reflection of the Bank’s comments but instead has to do with fears over the impact on global growth and commodity prices of tighter policy in China. The USD is broadly stronger today. Still it is noteworthy that even though CAD has lost ground against the USD it is still outperforming many of the other majors. We believe this is a theme we will see played out over and over again this year. EURCAD has broken to a new 2-year low and looks poised for further downside. • Technically, USDCAD is clearly losing downside momentum, and is in the midst of breaking above important levels. Support comes in at today’s open of 1.0314 and resistance lies the 50-day moving average of 1.0499. A crossing of the 9-day moving average (1.0312) above the 21-day (1.0393) would be a USDCAD bullish signal. C.S.

Europe

EURUSD (1.4150) • EUR has lost a percent against the USD and is underperforming GBP significantly. • Greece remains the key headline in the Eurozone, with Martin Wolf’s commentary in the FT garnering some attention today. His comments highlights that there are several vulnerable members of the Eurozone and the outcome is far from known. As he says “the Greek government has promised to slash its fiscal deficit from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012. Is it plausible that this will happen? Not very. But Greece is merely the canary in the fiscal coal mine”. The road ahead for the Eurozone is a difficult one and it will most likely cause some erratic trading in the EUR. Near-term technicals are turning increasingly bearish as the currency has dropped below its 200-day moving average of 1.4298 and support from the December low of 1.4218. We are increasingly cautious on the near-term outlook for the currency. Support from here lies at 1.4118, the 61.8% Fibonacci of the March to December 2009 rally. • ECB commentary in the last 12-hours was in line with previous comments. ECB council member Stark sounded fairly dovish as he commented that Eurozone growth will slow in the first half of 2010, while inflation pressures remain in the background. While ECB Nowotny pointed out the problems associated with consumer foreign currency loans (essentially a form of carry trades). C.S.
GBPUSD (1.6270) • GBP is struggling against the USD, but outperforming many of the majors. EURGBP is now trading at a five month low and looks poised to move lower still. • Governor King commented yesterday that in order to reduce global trade imbalances and avoid a repeat of last year’s crisis pressure needs to turn to the adjustment of real exchange rate. His speech was interesting and we have included a link to it in today’s Suggested Readings. • Fundamental releases from the UK were strong today, with jobless claims coming in at a surprising -15k, while the unemployment rate dropped to 7.8% (consensus had been 8.0%, while October’s release was at 7.9%). C.S.

Asia / Oceania

USDJPY (90.93) • USDJPY has simply retraced yesterday’s move higher. Support comes in at the 100-day moving average of 90.40. Early in tomorrow’s Asian session, Japan will release its all industry activity index. C.S.
USDCNY (6.8270) • Tonight’s release from China could prove an important market driver in the next 24-hours. Q4 GDP is expected to jump 10.5%. Any upside surprise could reverse today’s market activity. C.S.

Commodities

Oil (77.75) • Oil is holding in fairly well, considering news from China. It has dropped significantly from its January highs, but continues to trade above its 50-day moving average of 77.10. The 30-day rolling correlation between oil and CAD has dropped to 0.74. C.S.

Suggested Reading

The Greek Tragedy Deserves a Global Audience, Martin Wolf, FT (January 20, 2010) Foreign Buyers Shift to Long-Term Treasurys, Tom Barkley and Brad Davis, WSJ (January 20, 2010) Jobless Total In First Fall for 18-months, Brian Groom, FT (January 20, 21010) China Tells Banks to Halt Lending, Jamil Anderlinie and Sundeep Tucker, FT (January 20, 2010) Speech by Mervyn King, BoE (January 19, 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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