FOPLADE- Análisis Financiero.

GROWTH OUTLOOK PROVES MOST IMPORTANT VARIABLE
-Reassurance on the global growth outlook provides a lift to commodity currencies.
-FOMC inches towards a hawkish stance; but tighter policy is still months away.

-Moody’s warns on Portugal's fiscal situation adding to downside EUR pressure.
-RBNZ leaves rates on hold, signals mid 2010 rate increase.

FX Market Update

With the risk of the FOMC behind us, markets are generally positive today. Equities rallied in Asia and Europe, though remain well off their highs; commodities are stronger and the USD is mixed, with commodity currencies stronger and CHF, EUR and JPY weaker. General risk aversion is abating as the VIX dropped back to 23; however Greek spreads have climbed to a new record, which highlights the ongoing problems for the EUR. • The FOMC turned more positive on the outlook for growth, is concerned with the reluctance of employers to add to payrolls and recent weakness in the housing market and inflation concerns are inching higher. The dissention of Thomas Hoenig highlights the small step towards a more hawkish FOMC bias. However higher interest rates are still many months away and there are many hurdles to get through before we will see tighter policy. Scotia Economics has the first US hike in Q3 and from there the Fed raises rates aggressively, ending Q410 at 1.25% and Q211 at 2.25%. • The reaction to yesterday’s FOMC statement (equities rallying, bond yields dropping, EUR weakening and commodity currencies outperforming) was interesting and hints that in the current environment the market is more concerned with the global growth outlook than the path of interest rates. It also highlights that the USD is no longer a one way trade and an investment strategy that is played through the non-USD crosses should prove a rewarding one in 2010. In this environment we favour the commodity currencies. • The FOMC officially elected Bernanke as the Chair of the FOMC, which means that even if he is not confirmed as the Chair of the Fed he will still lead the rate setting committee for 2010. • President Obama’s State of the Union address held little for short-term currency traders, but the market has reacted positively. His focus was on job creation, the deficit and increasing exports, which would be helped by a weaker USD, however the true test for the medium-term USD trend will come with the ability of the US government to credibly deliver a plan on fiscal restraint. • Jobless claims are expected to drop back to the 4-week moving average of 450k. Considering the relevance of employment in determining the path of US interest rates from here, any surprise (particularly an upside surprise) will drive a currency response. Also today is the release of durable goods orders, expected to increase 2.0% and 0.5% ex transport. However the real test for currency markets will come with the release of tomorrow’s US GDP, where Scotia Economics expect an above consensus release. This would be good for the USD and commodity currencies. C.S.

Americas

USDCAD (1.0573) • Abating risk aversion, stronger commodities and a firmer global growth outlook has given CAD (and commodity currencies) a lift. There is no data from Canada today, which will leave markets driving off of the broader market trends. • The downtrend in USDCAD has been challenged, however as long as there is not a break above 1.0750 (the December high), we will maintain that the outlook for commodity currencies is strong and that CAD can rally even in the midst of a broader USD rally. Essentially what is good for the US economy is also good for Canada. We continue to expect USDCAD to move sustainably to parity by the end of Q210 and that it will close the year at 0.97 (a stronger CAD). The key risk to our view is a substantial change in the outlook for global growth; however for now we believe that most indications still point to an ongoing economic recovery. • Today’s pivots indicate that there would be short-term buying pressure at 1.0535 and selling pressure at 1.0665 (see table on page 2). C.S.

Europe

EURUSD (1.4008) • EUR is off 0.2% against the USD and holding near the bottom of the performance charts. EUR continues to feel heavy pressure and has suffered under the yoke of a 12 session downtrend (with resistance holding at 1.4075) while the longer term downtrend off of the December high of 1.5141 comes in at 1.4365 today. Apart from the ongoing punishment that the currency is taking on behalf of the Greek situation; witness yesterday’s surge in Greek bond yields which took the 10 year up over 50 basis points in one day to the current 6.827% (see graphic), recent German inflation and employment data are hardly supportive. German CPI fell by 0.7% m/m in January while unemployment data (though better than expected) showed that the positive momentum in the country’s jobs market has fizzled in the time since October. Downside technical momentum continues to build as evidenced by EURUSD’s MACD and today’s intraday low which pushed the pair to its weakest level since mid July. The crossover of the 50-day moving average through the 100-day m.a. from above (on January 14th) has spelt doom for EURUSD with the next major level of support coming in the 1.3750 to 1.3825 range. If the Greek problems were not enough, Moody’s has warned on Portugal saying the country needs “a credible plan for deficit reduction” if it is to avoid further downward pressure on its ratings. We cannot find a short term reason to be bullish EUR at the moment given the current political-economic environment and the strong technical downtrend in EURUSD, thus we suggest that near term short positioning continues to hold the best risk reward profile. S.T.
GBPUSD (1.6253) • Sterling remains an outperformer, gaining 0.4% against the greenback today. Yesterday’s comments from Bank of England policymaker Andrew Sentance continues to reverberate in the market and perhaps lead some to believe that the Bank of England may be more hawkishly positioned for rate increases than previously thought. However, we’d note that the Bank has fully expected inflation to show a temporary upside impetus (see the November projection) in late 2009 and early 2010 before fading well back below the 2% level by mid 2010. This suggests that as long as the market/public is fully confident in the Bank’s credibility and expectations are not impacted by the short term blip, the BoE should retain a more dovish bias than perhaps what Mr. Sentance’s comments would suggest, particularly given the still very weak UK economy. Cable is seeing uptrend support off of the January 7th low come in at 1.6120 today, while the 100-day moving average at 1.6295 could pose near term resistance. S.T.

Asia / Oceania

USDJPY (90.27) • The yen is trading down 0.3% against the USD as the weakest performing major. Yesterday’s FOMC statement, which the market interpreted as a hawkish shift, helped US short yields to surge thus boosting the fortunes of USDJPY as the rolling 1-month correlation between the US-Japan rate differential and USDJPY remains at very elevated levels (0.86). The incipient upward momentum in the pair will require short rates in the US to sustain their relative elevation in order to challenge the sharp downtrend in USDJPY off of the January 8th high which holds at 90.80 today. S.T.
NZDUSD (0.7125) • NZD is benefitting from the more constructive macro financial environment today as NZDUSD is trading up 0.7%. Yesterday the RBNZ kept rates on hold at 2.5% as the market expected. The policy communication highlighted the improved global and regional economic environment (in Australia, China and emerging Asia) though concerns were raised over a sustained recovery in its trading partners. Most key, the RBNZ said that if the economy continues to recover in line with their December projections, policy stimulus would begin to be removed around mid-2010. NZDUSD seems to have halted its weakness above 0.70, a level that looks to be providing solid support for the pair. However general USD strength, should it sustain itself, risks another hard test of this price point. S.T.

Suggested Reading

Chinese whispers drive up Greek yields, Tony Barber et al., FT (January 26, 2010) Warning over sell-off in bond market, David Oakley, FT (January 27, 2010) Why we should expect low growth amid debt, Carmen Reinhart, Kenneth Rogoff, FT (January 27, 2010) Mexico’s Central Bank May Buy Dollar Reserves From Market, Jens Gould, Jose Arrioja, BB (January 28, 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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