FOPLADE- Análisis Financiero.

MARKET LOOKS FOR STRONGEST US GROWTH SINCE 2006
- Risk environment more constructive today, though conditions remain tenuous.
- GDP releases from both Canada and the US to provide signpost for markets.
- Raw materials prices to support longer term CAD gains.
- EU deficits & soft CPI depress EUR; month-end flows could provide minor support.

FX Market Update

Global conditions are more supportive of risk trades today as equities in Europe are showing more buoyancy. The USD has lost ground through European trading after being well supported by another session of sharp equity selling in Asia. The USD index is now trading near flat on the day. NZD and CHF are leading, however with only modest gains, while EUR and JPY are lagging. Though global financial markets are looking a bit more stable today, the environment remains rather tenuous with volatility still likely to favour the downside in asset prices as downward momentum in the MSCI World index continued to build through yesterday. The ultimate currency market implication is that USD support is still in effect as the dollar index has pushed to its highest level (intraday) since August. This implies pro-cyclical growth currencies are still under pressure, and though we remain constructive on these currencies from current levels against the greenback, the macro-financial environment suggests some downside risk remains and that it may be beneficial still to wait on the sidelines a while longer for more attractive entry levels into long pro-growth FX trades.
• The release of Q4 GDP in the US provides an opportunity for a sentiment shifting event as expectations are set for the most robust quarterly growth read since Q1 of 2006. While all expect natural economic recovery momentum (inventory restocking, etc.) to help push a very positive read, financial markets, including FX, will be more heartened by evidence of self-sustaining (that is to say, non-policy induced) growth momentum taking hold. The one month rolling correlation between the USD and US short yields has rapidly broken down and moved negative over the past two weeks, so it is difficult to gauge the dollar’s reaction to a much better (or worse) than expected GDP print. The devil is likely to be in the details but given the once again strong negative USD-equity correlation, an equity boost on an upside surprise in growth should push the dollar lower, and vice-versa on a GDP disappointment.
• Federal Reserve Chairman Ben Bernanke was confirmed for a second four-year term by the US Senate yesterday. This removes the market risk of further uncertainty over the fate of US monetary policy stewardship, though this does not mean that the Fed or Chainman Bernanke will be insulated from further criticism regarding the handling of US monetary policy through the crisis and recovery S.T.

Americas

USDCAD (1.0650) • CAD is up 0.2% against the USD and trading in the upper echelon of major currency performers today. Greater stability in crude oil is helping CAD’s case; the one month rolling correlation between CAD and oil has been rebounding sharply and now stands at 0.8. Additionally, CAD is likely receiving better support ahead of the US GDP release as a rebounding US economy, and domestic demand in particular, will benefit Canada directly more than any other of the G-10 countries. Canada will see November monthly GDP data today (the market expects 0.3% m/m), though the impact is likely to be overwhelmed by the US growth data. More relevant to longer term CAD trends (but with nil immediate market impact), raw and industrial product price data will also be released today. Increases in raw materials prices correlates extremely well with Canadian terms of trade, which is of course supportive of CAD strength (see middle graphic). With an expectation of a 1.4% m/m gain in December’s raw materials price index, this long term fundamental dynamic supports our positive CAD view over the course of 2010. In the short term USDCAD is finding resistance just below the 1.07 level and we remain focused on the 1.0750 as a key topside level on USDCAD during this period of USD strength. S.T.

Europe

EURUSD (1.3955) • EUR is trading relatively close to yesterday’s close and has made only one failed attempt to move back above 1.40. • As fears over Greece escalate and general risk aversion continues to plague the market, EUR has had little ability (or reason) to rally. The members of the EU monetary zone are jointly accountable to each other and there is no bail out system in place. Currently there are close to 9 members who have breached the deficit rules, and issues in Greece have increased fears over the other weaker states. A major hurdle will be on February 3rd, when the EU will provide an assessment of the Greek budget. As the chart on page 1 highlights, CDS levels have increased for most of the weaker states as well. Since December 1, CDS levels on Portugal have increased 97bpts, while they have increased 60bpts on Spain and have been relatively flat on Ireland. Until there is more clarity on the path for the weaker member states, upside in EUR will be capped.
• Fundamental data from the Eurozone was mixed. The unemployment rate dropped back to 10%, while CPI came in softer than expected at just 1.0% y/y. Softer inflation speaks in part to excess slack in the economy and will remove some pressure on the ECB to move to a more hawkish stance. This will also cap upside in EUR.
• Today is month end, which could create some rebalancing flows. Underperformance from European equities could create some buying pressure as global managers rebalance their weights.
• Technically, yesterday’s close below 1.40, only added to the already bearish near-term outlook. Though we continue to believe that EUR will close the year above 1.40, for short-term traders all evidence points to further near-term downside. A closing weekly low below 1.40 will be particularly bearish. C.S.
GBPUSD (1.6150) • Sterling continues to trade in its narrowing range and is hovering just below its 50, 100 and 200 day moving averages (1.6239, 1.6288 and 1.6223, respectively). The ability of GBP to hold within its range over the last five months is noteworthy and speaks to its potential outperformance in the near-term. • Supporting the currency today has been the release of positive fundamental data. GfK consumer confidence improved from December and Nationwide house prices increased 1.2% m/m and 8.6% y/y. Yesterday’s comments from S&P that the UK banking system is no longer the most stable globally should come as no surprise. Markets initially used it as an excuse to sell GBP, but focus on this seems to have tamed through the Asian and European sessions. • Today’s pivots suggest that buying pressure will be found at 1.6063, while selling pressure will emerge at 1.6228 - see table. C.S.

Asia / Oceania

USDJPY (90.30) • USDJPY is trading back above 90 but with little conviction. • Finance Minister Kan commented today that “we’ll work together with the BoJ to take a comprehensive and powerful approach to overcome deflation”. There is clear pressure on the BoJ, which over time could begin to weigh on the credibility of the BoJ. The release of the minutes from the BoJ’s emergency meeting in December highlight that it was called due to instability in currency markets. Accordingly, its response (introducing the $110bn loan program) appears to have been at least in part targeted towards creating a reaction from yen. Today, Shirakawa commented that the BoJ will not use monetary policy to influence FX policy. C.S.
USDCNY (6.8268) • There is some market anticipation over what China will post for its PMI in the early Asian session (Sunday evening for North America). Consensus is looking for 56.5. Considering the nervousness of markets over the outlook for global growth there is some risk associated with the release. C.S.

Commodities

Oil (73.90) • Oil prices formed a doji (open and close at the same level) yesterday, which highlights indecision in the market. It is currently trading between its 100 and 200-day moving average (75.49 and 69.97, respectively). C.S.
Suggested Reading
EU Signals Last-Resort Backing for Greece, T. Barber & D. Oakley, FT (January 29, 2010) Bernanke wins new term as Fed chief, Tom Braithwaite, James Politi, FT (January 29, 2009) Darling rules out help for Greece, Chris Giles, FT (January 29, 2009) Vice-premier defends Chinese Policy, David Piling, FT (January 28, 2010) Portugal minister hits at rating agencies, Peter Wise, FT (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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