FOPLADE- Análisis Financiero.

RBA SURPRISES MARKET AND SENDS AUD WEAKER USD index weaker for the second day as macro financial picture improves.
-CAD moving higher, particularly against AUD.
-The stars begin to align for EUR; a close above 1.3970 would be near-term bullish.

FX Market Update

Equities are better bid today on solid Japanese and European gains, bonds are underperforming while commodities are doing better, all to the detriment of the USD which is trading weaker after losing ground through Asian and European trading. Though there isn’t an overly large gap between the better performing currencies and the USD today, NOK, CAD and SEK are doing quite well while GBP, NZD and AUD are weakest, particularly the latter as the RBA confounded market expectations and kept rates on hold.
• The greenback seems to be at least temporarily halting its current leg higher as the US dollar index peaked out at just above 79.53 and has run into resistance at the 79.40 level over the past 24 hours. The strong negative correlation (via a rolling 1-month calculation) between equities and the US dollar has reestablished itself since early January and has now skyrocketed back to near -0.94. On the rate side of the picture, the positive trading correlation between US short rates and the US dollar index that had held since early November (at quite strong levels we might add) broke down rapidly in late January and has now moved significantly negative over the past week to -0.53. This is actually the most elevated negative correlation between the USD and short US rates since November of 2008. Despite the slight hawkish tilt of FOMC member Hoenig last week, Fed Funds futures are still rather depressed with the October contract trading at very subdued levels with an implied yield of 0.4%. Still, directional trading in the USD is tending to be driven in a less one-sided fashion than in the 2009 asset price recovery, with short term rates playing a much more supportive role and creating disincentives for USD funded carry trades.
• In addition, we continue to see better economic data emerge from the US with yesterday’s January ISM which showed the manufacturing sector moving at the strongest pace of expansion since 2004. All measures tended to show positive indications while the employment sub-index jumped to its highest level since 2006, boding well for the non-farm payroll data on Friday. Additionally, the prices paid component is also moving decidedly higher. However, this might not be reason for great concern regarding inflationary pressure as manufacturers are not as likely at this point to pass on such increases as pricing power remains pressured by high unemployment. S.T.

Americas

USDCAD (1.0584) • CAD is outperforming, up 0.3% and lagging only NOK today. The recovery in commodity prices has provided a more supportive environment for the currency, as has the improving US fundamental background as witnessed by the aforementioned ISM. USDCAD has turned sharply downwards and is now running into support above its 100-day m.a. at 1.0558. A break looks particularly encouraging given the supportive short term market environment and expectations for Friday’s employment data in both the US and Canada. CAD has also been able to make significant ground up against AUD following the RBA’s decision. This highlights a key difference between CAD and AUD (two prominent commodity currencies). Australia, which avoided a recession on the back of Chinese demand, has been able to exit monetary easing earlier than Canada, a country for which a strong trade connection to the US has weighed on monetary policy. As Australia may now be cognizant of China’s monetary tightening and its impact on trade, the recovery in the US and Canada could drive more bullish relative monetary tightening expectations for CAD vis-à-vis Australia in the near term, setting up CAD for short term out performance. However, the 200-day moving in AUDCAD at 0.9285 (see graphic) presents a significant first hurdle. S.T.

Europe

EURUSD (1.3950) • The EUR is essentially flat today. The only data release was firmer Eurozone PPI (climbing 0.1% m/m and dropping -2.9% y/y). • Bond market fears over Greece reached a high last Thursday and have since fallen back as Greek CDS levels have fallen 37bpts since reaching their high of 422bpts and the Greek 10yr bond yield spread over German bonds has dropped 66bpts from its 396bpts high - see chart. This hints that the market is stabilizing and that much of the bad news is now priced in. However, EUR has been unable to rally to the same degree and continues to trade within last Friday’s range (1.3862 to 1.3988) and below Thursday’s close of 1.3971. The collapse in EUR from its 1.5144 November high was not only due to sovereign issues in Europe, but risk aversion, firming US data and sentiment also played an important hand. Risk aversion, as measured through the VIX, has dropped from its January 28 high to 22 yesterday, a negative for the USD. However, data from the US has been firm over the last few sessions and sentiment is mixed. On the bullish front, the 3-month risk reversal has fallen well off its January high, while speculative positioning (CFTC) remains bearish EUR. Technically, yesterday’s failure to break to a new low was positive for bulls, however until EUR has the ability to break above 1.3970, Friday’s close, traders will remain cautious. However, a break above 1.3970 would be a buy signal. We think the combination of fundamentals and technicals are beginning to hint at stabilization in EUR and could open up a rally back up to 1.4194 (last Monday’s high). Accordingly, a close above 1.3970 today, would see us turn near-term bullish EUR. For the medium term, we no longer expect materially outperformance in EUR, but do expect it to climb back to a 2010 high of 1.4700 by the end of Q310. • For today, pivots indicate that buying pressure would materialize at 1.3885 and selling pressure at 1.3988 -see table. C.S.
GBPUSD (1.5950) • GBP is soft against both the USD and EUR today. There have only been minor developments today, with the only data release being an above consensus reading on construction PMI (48.6). • Cadbury shareholders have until mid-day to accept Kraft’s bid. A positive outcome would be positive for GBP. • Technically, GBP is looking increasingly weak. For today, pivots indicate that buying pressure would materialize at 1.5872 and selling pressure at 1.6000 -see table. C.S.

Asia / Oceania

USDJPY (90.70) • USDJPY is essentially unchanged from yesterday’s North American close. Some focus today on the upcoming G7 (this weekend) as Japan’s finance minister Kan said that they will discuss the Chinese yuan. • Yesterday, the 50-day moving average crossed above the 100-day (90.30 and 90.24, respectively) generating a technical buy signal; however there has not been any confirmation from other studies. The MACD has yet to cross above the signal line, the 9-day moving average is still below the 21-day (90.18 and 91.02, respectively) and the major 2.5 year downward trend line remains in place. C.S.
AUDUSD (0.8820) • The RBA surprised the markets, leaving interest rates on hold at 3.75% (market had priced in a 70% chance that the RBA would hike 25pbts to 4.0%), but the RBA left the hawkish bias in place. AUDUSD sank 120 points on the release, while AUDCAD dropped 140 and EURAUD rallied 230 points. The RBA pointed to four reasons to justify leaving rates on hold: 1) Chinese authorities are reducing stimulus in their economy; 2) inflation is expected to be consistent with the target; 3) lenders have raised rates above the cash rates; 4) information over the impact of previous rate hikes is still limited. Accordingly, the RBA is taking a wait and see approach. The next meeting is scheduled for March 1. • Support for AUD lies at 0.8735, the December low, followed by 0.8556, the 200-day moving average. Support for AUDCAD lies at the 200-day moving average of 0.9285. C.S.

Commodities

Oil (75.35) • Oil is attempting to break back above its 100-day moving average (75.56) and the upward 1-year trend remains in place. A break higher would be positive for CAD. C.S.

Suggested Reading

Deficit Balloons Into National Security Threat, Gerald Seib, WSJ (February 2, 2010) How to Make a Weak Economy Worse, Amity Shlaes, WSJ (February 2, 2010) Global manufacturing surges back, James Politi et al., FT (February 2, 2010) The best course for Greece is to call in the Fund, Jean Pisani-Ferry, Andre Sapir, FT (February 1, 2010) Demand for corporate loans in US falls, Fancesco Guerrera, James Politi, FT (February 2, 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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