FOPLADE- Análisis Financiero.

CHINA RELEASES STRONG Q4 GROWTH; USD STABILIZES The outlook for CAD is still strong, even in the midst of a bout of USD strength.
-Several majors fall below their 100-day moving averages, accelerating USD strength.
-EUR is pressured by rising Greek CDS spreads, which have jumped to 345.
-China’s Q4 GDP comes in surprisingly strong at 10.7%.

FX Market Update

• After China released surprisingly strong Q4 growth, the market is mixed. The USD is losing some of its earlier gains as profit taking on USD longs takes hold. AUD has gained 0.1% against the USD, while CAD is flat and GBP and JPY are losing ground. However, currencies are generally at far weaker levels than they were a few sessions ago.
• Yesterday there was an important shift in the USD. Most currencies have now dropped below their 100-day moving averages, including EUR, GBP, CHF, NZD, NOK and AUD and CAD are within 100 points of theirs (please see the table on page 2 for specific levels). This highlights the important shift in sentiment that the market has undergone and warns that for the near-term investors are increasingly nervous to be short the USD. We have not changed our outlook on CAD - see CAD section below, nor have we changed our medium term outlook for the other majors; however we do think sentiment can be an important near-term driver of currency markets. The driver of yesterday’s strength in the USD was a combination of the Massachusetts Republican win, tighter loan standards in China, increasing concerns over Greece and technicals.
• We have never used PPP as an important part of our valuation process as currencies can stay well above or below their PPP value for years at a time. However, we have noticed a resurgence in references to it - most likely to help support a bullish USD case. Accordingly we thought it might be interesting to include a chart of PPP valuations (see top chart) for reference purposes. Though NOK, AUD and EUR are all considered 15%+ overvalued; CAD, GBP and JPY are actually quite close to fairly valued.
• There is some focus on the increasing percentage of direct bids in recent Treasury auctions - the identity of these bidders are unknown since they go directly to the Fed. For instance 12% of yesterday’s 4-week bills went to direct bidders, almost three times higher than the more traditional level. There are a host of reasons why bidders might want to hide their identity and the impact on the USD is debatable. However it is an interesting trend that bears paying attention to in coming auctions.
• Today’s earnings reports will include Google and AMEX while expected fundamental releases include jobless claims, Phily Fed & leading indicators. C.S.

Americas

USDCAD (1.0480) • USDCAD broke briefly above its 50-day moving average of 1.0499 but has since drifted lower. We recognize that sentiment towards the USD has turned favourable, but we have made no changes to our view on USDCAD and continue to believe that we will reach parity on a sustainable basis in Q210. Even in the midst of a period of broad USD strength, we think CAD can outperform as many of the factors that could prove bullish for the USD will also work in CAD’s favour. In summary, CAD should outperform in 2010 due to its relative fundamental position, which includes a reasonably strong growth profile, a better relative fiscal position and minimal sovereign risk. In addition, we expect that with the ongoing global recovery commodity prices should move higher, benefitting CAD. Finally, we think sentiment is still favourable for the medium-term outlook on commodity currencies - and confirmation from Russia yesterday that they have started to buy CAD assets can only help. • Can CAD rally alongside the USD? Historically, we have seen several periods of this. In the current environment, an improving US economy, tighter monetary policy in both the US and Canada and nervousness surrounding the EUR should all work in CAD’s favour. We continue to look for CAD strength in 2010. • Today the BoC will release its Monetary Policy Report, which will give us further insight into what the Bank’s outlook is. C.S.

Europe

EURUSD (1.4050) • EUR dropped further during the Asian and European sessions and is now moving closer to a test of the psychologically important 1.4000. Technically, the currency is weak and has not yet entered oversold territory (its RSI is currently at 29). • As the middle chart highlights, EUR has been moving in tandem with Greek CDS spreads. As fears over the future of Greece and the implications for the EU and EUR escalate there is increasing downward pressure on EUR. We find ourselves increasingly cautious about the near term trading outlook for EUR and will look to changes in sentiment to guide us. As long as sentiment remains as bearish the EUR as it is, the currency will struggle to rally; however once we see some stabilization in sentiment, the outlook for EUR should improve. • Fundamental data from the Eurozone today included a weaker than expected PMI, with services dropping to 52.3, manufacturing increasing to 52 and the composite falling to 53.6. The release was generally weaker than expected, but still above the important 50 - expansionary level. • The ECB published their monthly report, which was inline with Trichet’s comments last week. Highlighting that the recovery is underway and medium to longer-term inflation expectations are firmly anchored. The report also encouraged its member countries to prepare fiscal adjustment strategies, while Trichet commented today that EU member country deficits must be cut in a timely fashion. C.S.
GBPUSD (1.6130) • GBP has dropped below its 50, 100 and 200-day moving averages (1.6303, 1.6309 and 1.6178, respectively). EURGBP has managed to recovery some of yesterday’s losses, but has not yet broken above yesterday’s open. • The January release of UK CBI factory orders showed an improving trend, with total orders less negative at -39. C.S.

Asia / Oceania

USDJPY (91.80) • Yen is the weakest performing currency today as USDJPY is trading back above 91.00. Japan’s leading index remains well off its lows, but dropped slightly from last month’s reading. C.S.
USDCNY (6.8270) • In the fourth quarter China’s real GDP grew at a surprisingly strong 10.7% (and Q3 was revised up to 9.1%). Strong growth from China, combined with small increases in monetary policy, is reassuring for global growth. Chinese inflation data came in higher than expected with CPI jumping 1.9%y/y and PPI increasing 1.7%. Accordingly, inflationary pressures combined with strong growth will increase pressure on Chinese authorities to tighten policy and to allow some appreciation of the yuan. We view today’s releases as positive for the global economy, commodities and commodity currencies like CAD. C.S.

Commodities

Oil (77.75) • Oil has recovered some lost ground and so far the 50-day moving average has held on a closing basis (77.11). Oil has had a difficult few sessions as the combination of a stronger USD, rumours of JAL selling off their oil hedges and increasing investor risk aversion have all pressured the commodity. Today’s oil inventory report (delayed by a day because of the US holiday on Monday) is expected to show an increase of 2.4m. C.S.
Gold (1104.75) • Gold remains under pressure as the USD rally pressures commodities. The 100-day moving average is the next level of support and lies at 1086.23. C.S.

Suggested Reading

CIC Places Focus on Emerging Asia, Ellen Sheng and Rick Carew, WSJ (January 21, 2010) Prospect of Chinese Tightening Lifts Dollar, Peter Graham, FT (January 21, 2010) Avoid False Alarm on UK Inflation, FT (January 21, 2010) Global Jitters Boost Dollar, Fabio Alves, WSJ (January 21, 2010) ECB Monthly Bulletin, ECB (January 21, 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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