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USD ENTERS HOLIDAY WEEKEND ON FIRMER FOOTING USDCAD closes at 14-month closing low; but has yet to break below 1.0207.
-US CPI could be important market driver today.
-Trichet’s comments on strong USD and hurdles facing EU weigh on EUR.
-China’s SAFE says it will improve transparency of FX policies.

FX Market Update

As we enter the US long weekend, the market is vulnerable to some profit taking and closing of short-term positions. This might have added to the positive tone for the USD set by Trichet’s comments, but most currencies are still trading within yesterday’s ranges. US equity futures are unable to mount a real rally even as Intel and JP Morgan have reported better than expected earnings. However, market sentiment continues to be strong as yesterday the S&P index hit a new 14-month high, the VIX is trading comfortably below 20 and at an 18-month low and the two year bond yield remains at its 100-day moving average of 0.90%. In this environment we would have expected the USD to be weaker than it is. The DXY is trading at 77.15, having been unable to break below its 100-day moving average of 76.46 over recent sessions.
• Sentiment, which swung quickly in favour of the USD in December, seems to be increasingly more balanced. There is still hesitancy to be long EUR, even though we think that this position will prove rewarding over the 3 month horizon. At a minimum short EUR positions have decreased from their highs, there is less EFT appetite to be long USD (see middle graph) and speculators are no longer building short EUR positions. In addition, pricing in the option market is far more balanced, no longer positioning for a spike higher in the USD. Accordingly, this more balanced market should allow currencies to trade off of fundamentals. We continue to believe that it is too early to be long the USD on medium term timeline.
• Indirect bids in yesterday’s 30-year auction were in line with previous auctions at 40.7%, which should provide some reassurance to those worried about how willing foreign central banks will be to fund the US deficit. • Today’s CPI will be important with any deviation from consensus having a impact on the USD. Today the US will also release empire manufacturing, industrial production, capacity utilization and University of Michigan confidence. C.S.

Americas

USDCAD (1.0265) • The USD is broadly stronger today, which has taken USDCAD off its recent low, but has still left downside momentum in place. Yesterday USDCAD reached a new 3-month intraday low and a new 18-month closing low. We think this provides evidence that momentum is still behind the down move in USDCAD. A break below the October intraday low of 1.0207 is the next test for the currency, but we expect this to be achieved in the near-term. Support comes in at the October low of 1.0207, while resistance lies at the one-month downtrend line of 1.0376. • Should oil continue to drop lower it will dampen our expectations for CAD; however this is not our base case. • There are no key releases from Canada today, but next week will see the BoC interest rate decision. It is universally held that interest rates will remain at 0.25% and accordingly the focus will be on Governor Carney’s comments. In the last MPR, the BoC used 1.04 as their estimate for USDCAD. We are still trading very close to this level. Accordingly, we think the BoC will raise CAD as a risk to growth and inflation but that it will not increase its concern over the currency. In addition, the BoC is sensitive to what drives CAD appreciation (Type 1 or 2). We think that the recent strength in CAD has been more fundamentally led, which will give the BoC less of a need to respond through monetary policy. Accordingly, we do not expect developments at next week’s BoC meeting to dampen our outlook for an appreciating CAD. C.S.

Europe

EURUSD (1.4390) • EUR is underperforming today, having lost 0.7% against the USD. • There were no major surprises from the ECB yesterday. Trichet reiterated the importance of a strong USD, noted that there are significant hurdles that face the EU and that inflation pressures seem balanced, with commodities adding upside risks and the economic environment adding downside risk. His tone was balanced, but far from optimistic. Finally, he provided no hint that tighter monetary policy is on the near-term horizon. • Today’s Eurozone CPI came in at 0.3% m/m, 0.9% y/y and 1.1% y/y on core. Accordingly, inflation pressures in Europe remain contained, but continue to creep higher. Any acceleration in inflation measures will concern the ECB and should provide a boost to the EUR. • The Eurozone trade balance came in at a disappointing 4.8b as exports fell 0.4% m/m. This drop in exports will be concerning to those who worry over the impact of EUR strength (in November the average closing level of EUR was 1.4928). • Technically, EUR is trading squarely between its 100 and 200-day moving averages (1.4679 and 1.4283), a break of either side will provide a hint as to the pressures on the currency. Short-term technicals continue to be bullish, however with the ADX, which attempts to quantify whether or not an asset is in a trending or non-trending environment, only at 19 there is increasing evidence that EUR is content within its recent 1.4218 to 1.4579 range and a catalyst will be needed to push it higher. We continue to believe that the near-term outlook for EUR is strong and hold a Q110 forecast of 1.5000. C.S.

Asia / Oceania

USDJPY (90.90) • The yen is stronger on a broadly stronger USD and news from the MoF that foreigners were aggressive buyers of equities and bonds in the first week of January. • The US - Japanese two-year bond spread continues to be the key driver of USDJPY. The spread has dropped back to 73bpts, which has put downward pressure on the currency. Technically, a break below the 100-day moving average of 90.45 would be bearish USDJPY. C.S.
USDCNY (6.8270) • China’s reserves rose to $2.4bn in December, a 23% y/y increase and a 0.4% m/m increase. Accordingly, China continued to be an important buyer of USD in December. • With no specifics, SAFE (State Administration of Foreign Exchange) has released a statement saying it will improve the transparency of its foreign-exchange policies. • Since the release of strong year-over-year exports and slightly tighter monetary policy, yuan forwards have increased the amount of CNY appreciation they are pricing in over the next year from 2.4% to 3.25%. We believe that we will soon see Chinese authorities allow a measured appreciation of the yuan. • New yuan loans increased to 379.8b in December. This is well off the high of 1,891 we saw in March 2009, but higher than November. C.S.

Commodities

Oil (78.90) • Oil has now fallen down below $79/barrel as downward pressure on commodities continues. The CFTC is proposing to impose new trading restrictions on the largest traders in oil and energy - see suggested readings. This is weighing on oil prices. C.S.

Suggested Reading

Inflation Threat to China and India, FT (January 15, 2010) In Reversal, Federal Regulators Now Propose to Limit Oil and Gas Commodities, Zachary Goldfarb, The Washington Post (January 15, 2010) Trichet Rejects Special ECB Help for Greece, Brian Blackstone, WSJ (January 15, 2010)

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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The Plaza Futures Group



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