FOPLADE- Análisis Financiero.

USD VULNERABLE TO TODAY’S FOMC STATEMENT BIAS IMF upgrades global growth view but warns on lack of autonomous private demand.
-USDCAD option market pricing shows heightened concern for further upside.
-Currencies show only minor movements leading into the FOMC decision.
-Sentiment, risk aversion, sovereign risk & low growth profile all weigh against EUR.

FX Market Update

The FX market is defying the generally dim global market environment today as many majors are in the black against the USD despite continuing weakness in global equities. Asian equities fell again, though recording smaller losses, while European bourses are in the red. Commodities are mixed and US yields are nudging higher. This has left CAD, NOK and JPY as underperformers while GBP significantly outperforms.
• We’d expect the FX trading to be muted in the later stages of the North American morning as markets prepare for the FOMC statement. There is only one way that the Fed will be heading with monetary policy at this point, and that is in a tightening direction, which is why the risk bias to the announcement lies in the introduction of a change in verbiage regarding the “extended period of time” that rates are expected to remain low. There is also the risk of further development along the lines of liquidity management which the Fed will be proactive on in order to maintain public confidence in its ability to usher the economy out of the lax monetary environment of the day. However, we do think that ahead of Mr. Bernanke’s confirmation and the current tenuous nature of global markets that we may see downward pressure on the USD out of no major changes in the communication, though any shift towards a more hawkish stance should be constructive for USD price action. Incidentally, it will be interesting to note the reaction of global markets to any Fed announcement of tightening (whenever it comes), particularly as it compares to the reaction to similar Chinese steps. While it is likely that any hawkish Fed bias would prove USD supportive, it is more unlikely that it would have the same widespread impact on global financial markets (equities, commodities and FX) that similar Chinese moves have had, a signal of the ongoing global economic power shift.
• Yesterday the IMF released its World Economic Outlook Update which upgraded world economic growth by 0.8% in 2010 and 0.1% in 2011 (to 3.9% and 4.3% respectively). While positive, the IMF noted that there were still few indications that autonomous private demand (that which is not policy induced) was taking hold in advanced economies and that the rebound would be weak by historical standards. This leads the IMF to consider further policy support as crucial in order to sustain the recovery in the near term, though commitment to eventual concrete fiscal consolidation will be important. It is interesting to note the degree to which major economies are expected to regain lost ground following the “Great Recession”. It is of particular note the gap between the growth profile of emerging economies and advanced economies, but also that the US is expected to do much better than other advanced economies (note the beleaguered Eurozone). Additionally, the IMF foresees inflationary pressures being much more pronounced in EM economies in 2010, which argues for an earlier exit to loose policy relative to developed economies and a greater degree of EM currency strength (particularly in EM Asia). S.T.

Americas

USDCAD (1.0630) • CAD has been volatile, but is now flat against the USD and underperforming the other primary currencies. No data until Friday’s GDP suggests that USDCAD remains at the whim of USD trends and the market’s reaction to the Fed announcement. The options market is showing that the bias of concern is still for further USDCAD upside (see middle graphic) as the premium for USDCAD calls over that of USDCAD puts holds at its highest level since mid December of 2008. However, such extreme option market positioning can also signal that a rapid change in market sentiment is imminent. S.T.

Europe

EURUSD (1.4075) • EUR briefly touched down to a new six month low during today’s European session. Sentiment against EUR continues to be bearish. Today’s focus will be the FOMC but the other near-term concerns remain risk aversion, sovereign issues, a lower relative growth profile (see top chart on page 1) and softer inflation data, which are all weighing on EUR. These are real issues for the Eurozone and we expect them to limit EUR gains going forward, with our near-term bias for further EUR downside. However, we do not think there is sufficient reasons for the USD to sustain a long-term rally against EUR and accordingly hold on to the belief that in the medium-term the USD might not weaken at the pace we previously thought, but that all in all the USD will remain at weak levels.
• In the last 12-hours there have been two developments that are highlighting near-term weights against the EUR. In a report issued today, the European Commission said it will propose stepping up the procedure to have Greece take action to correct its deficit. Secondly, regional CPI data from Germany has been soft, with most reports showing a month-over-month drop of over 0.6%. This should provide some leeway to the ECB, but still leaves the council with a difficult mandate, as they attempt to implement monetary policy across such diverse economies.
• Technically, EUR has not reached oversold levels (the RSI is only 31) and most studies and patterns continue to be in sell territory (including moving averages, candlestick patterns and the daily and weekly MACD). Accordingly, for very short term traders we argue that short positions should prove rewarding. Support from here lies at 1.40 and a break below could increase selling pressure. Significant resistance lies at the 200-day moving average of 1.4325. • Today’s pivots indicate that there would be short-term buying pressure at 1.4007 and selling pressure at 1.4164 (see table). C.S.
GBPUSD (1.6210) • Sterling is stronger today, but is unable to break out of its recent narrowing pattern. The 50, 100 and 200 day moving averages are all converging (1.6257, 1.6299 and 1.6209, respectively). This pattern will need to be broken in the near-term and it is this break that will foreshadow the move from current levels. Today’s pivots indicate that there would be short-term buying pressure at 1.6124 and selling pressure at 1.6299 (see table). • The BoE’s Sentance commented today that “while the combination of above-target services inflation and rising import prices persists, it will be difficult for the MPC to keep inflation on target”. Rising inflation will continue to be a significant hurdle for the MPC. C.S.

Asia / Oceania

AUDUSD (0.9000) • Australian Q4 inflation came in above expectations at 0.5%m/m and 2.1% y/y. This offsets some of the dovishness from the soft PPI release earlier this week. The RBA meets on February 1st and is expected to increase interest rates by 0.25% to 4.0%. • AUD has now broken through its 50 and 100-day moving averages (0.9088 and 0.9041, respectively) and looks vulnerable to further near-term downside. However, we continue to maintain that in a period of improving global growth AUD should appreciate. C.S.
USDCNY (6.8268) • The PBoC’s Zhu commented today that a stable renminbi is good for China and good for the world. • China’s leading indicators dropped back from the October high to 104.80. This is still well above the average of the last 20 years and provides further reassurance that the outlook for China remains strong. C.S.
Suggested Reading
Obama faces backlash on spending freeze, Krishna Guha, Edward Luce, FT (January 26, 2010) Geithner braced for grilling on AIG, Tom Braithwaite, FT (January 26, 2010) Senate Action Shows Difficulty of Cutting U.S. Budget Deficits, Brian Faler, BB (January 27, 2010) Bullwhip Hits Firms as Growth Snaps Back, Timothy Aeppel, WSJ (January 27, 2010) A Bleak Budget, But Slightly Better, John McKinnon, WSJ (January 27, 2010) For Inflation Tips, Look to ‘5yr5yr Breakeven’, Tom Lauricella, WSJ (January 27, 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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