FOPLADE- Análisis Financiero.


FOCUS TURNS TO EXPECTATIONS FOR FOMC & GDP • The focus turns to the FOMC - interest rates should dominate USD trading from here.
-Rumours circle that Davos bankers will lobby against Obama reforms.
-Expectation that Greek bond issue will be well received gives a boost to EUR.
-CFTC data - sentiment grows more bearish against EUR, stays bullish CAD & AUD.

FX Market Update

• The USD is on weaker footing as equities and commodities recover lost ground. Rumours that Davos bankers will lobby against Obama’s bank reforms combined with an expected solid response to the Greek bond issue and comments from PIMCO that the end of the USD bear market is nearing have given markets a lift. Last week was a difficult one with risk aversion coming back into the market and the USD benefitting from political and fundamental developments. Several charts are hinting at a period of stabilization on the horizon, which implies that the recent USD move might be nearing completion.
• The focus this week has turned to the FOMC decision on Wednesday. Any hint that the FOMC is on the verge of turning more hawkish will extend the near-term USD bid tone further. However, a dovish tone could stabilize the EUR and other currencies. The combination of inflation expectations remaining contained, December nonfarm payrolls dropping back to a loss of-85k, jobless claims moving higher and ongoing volatility in the pattern of the recovery should limit any hawkishness in the Fed’s tone. However, the ongoing general improvements in the economy could provide for a more balanced statement. At some point the reference to “extended period” will have to be removed, however we are not convinced it will occur at this meeting. The other focus will be any change or guidance on the MBS buying program.
• Also this week will be the release of US Q4 GDP, with consensus looking for a gain of 4.6% q/q. Scotia Economics is of the view that the risks is to the upside due to the impact of inventories. Should GDP surprise higher it would lend support to the USD. • Today the US will release existing home sales, but as the chart on page 1 highlights, it is expected to weaken notably due to the significant recent drop in pending home sales.
• The Senate has provided some reassurance this weekend that Chairman Bernanke will be confirmed. If he is not confirmed by January 31st, Vice-Chair Kohn will become acting Fed Chair until another nominee is confirmed. However, the FOMC will vote for their chair at this week’s meeting, accordingly as long as they vote for Bernanke, which it is widely expected they will, Bernanke will remain the Chair of the FOMC even if he is no longer the Fed Chair.
• The weekly CFTC Commitment of Trader’s data which shows the speculative positioning in the FX futures market confirmed the trends we have been seeing in the market. Sentiment against the EUR continued to grow, with the net short EUR position now standing at $4.5bn. However, sentiment towards the commodity currencies continued to be bullish, with the AUD net long increasing to $5.8bn and the CAD net long staying essentially unchanged from the previous week at $4.5bn. To put this into context, the largest net long in CAD recorded in the last six years was $8.3bn in the fall of 2007. Accordingly, though the net long CAD position is large and leaves the currency vulnerable, it is not at the extreme level we saw back when CAD reached parity in 2007. C.S.

Americas

USDCAD (1.0550) • CAD is stronger today, but is underperforming the rest of the commodity block. We continue to believe that CAD should outperform most of the majors, even during a bout of USD strength, particularly if the strength is driven off of fundamentals and not risk aversion. Fundamental positives for the USD are also generally good for the Canadian economy and hence CAD. It is also interesting to note that since the recent low in the USD was hit on November 26th, CAD and MXN have outperformed significantly. This speaks to markets looking at trading CAD, MXN and USD as a NAFTA block. This is an old theme that we haven’t seen in a few years, but it is possible we will return to this in the midst of an economic recovery. C.S.
Europe
EURUSD (1.4180) • EUR is off of last week’s lows (1.4029) and has gained 0.3% against the USD today. • The only data released today has been German GfK consumer confidence, which dropped to 3.2 - the lowest reading since last July, but above the 3.1 consensus estimate. • Technically the pattern formed last week is somewhat encouraging for bulls, however it would take a break and close above 1.4288 (last Wednesday’s open) for any bullish signals to really be triggered. • Greek 5yr CDS spreads remain elevated at 340 and the spread of Greek 10yr bonds over bunds is also close to its highs at 296bpts. As the charts on page 1 highlight, these spreads continue to be key near-term drivers of EUR. This morning’s jump higher in EUR was the result of the expectation that the Greek 5yr issue will be well received. This highlights the sensitivity of EUR to developments in Greece. At some point the bad news on sovereign risk will be priced in and EUR will be provided with the opportunity to stabilize. We think we are approaching this period. C.S.
GBPUSD (1.6150) • Sterling has climbed off of Friday’s lows, but remains below its 100 and 200-moving averages (1.6305 and 1.6192, respectively). There was no data released from the UK today. The focus is on comments from Chancellor Darling in the Sunday Times where he said that new US bank proposals would not have prevented the crisis and that there were serious shortcomings in Obama’s plan. Markets have welcomed this commentary. However, offsetting some of the positive developments today is news that the UK has raised the terrorism threat level substantial to severe - meaning an attack is highly likely. C.S.

Asia / Oceania

USDJPY (90.25) • USDJPY is trading within Friday’s range, has recovered from earlier losses and is moving either side of its 100-day moving average of 90.32. • After the North American close the BoJ will release its interest rate decision. The Bank is widely expected to leave rates on hold at 0.1%, but any developments on emergency loan programs and any subsequent commentary will be important. With ongoing yen strength, rhetoric from the BoJ will be scrutinized. C.S.
AUDUSD (0.9050) • AUD has firmed today, gaining 0.5% against the USD and outperforming most of the primary currencies. • PPI came in well below expectations, dropping -0.4% q/q and -1.5% y/y. The release was a good example of how a strong currency dampens inflation as the cost of imported goods dropped significantly. • On a medium term basis, we think the outlook for AUD remains strong. As long as the global recovery story remains in tact, the prospects for Australia and by default AUD are solid. We hold a 0.97 year-end target for AUD. C.S.

Commodities

Oil (74.71) • Oil has moved off of Friday’s lows, but still looks vulnerable. The 30-day rolling correlation between CAD and oil is at 0.78. Accordingly, developments in the oil price continue to be an important near-term driver of CAD. C.S.
Gold (1103.00) • The gold chart is interesting. Friday’s pattern formed a doji (open and close at the same level), which indicates indecision in the market. This morning’s move higher is positive and a close above Thursday’s open of $1,111.40 would be particularly encouraging for bulls. C.S.

Suggested Reading

National Economies Hinge on Shaky Withdrawal from Stimulus, Marcus Walker, WSJ (January 25, 2010) The Profit and Pain of Stimulus, Tom Lauricella, WSJ (January 25, 2010) Direct Bidders Get Treasury Sale Focus, Deborah Lynn Blumberg, WSJ (January 25, 2010) Alistair Darling Warns Barack Obama Over Banking Reforms, David Smith and Iain Dey, Times Online (January 25, 2010) Davos Bankers to Lobby Against Obama Reforms, Katie Allen, UK Guardian (January 25, 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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