FOPLADE- Análisis Financiero.

MARKETS SHIFT BACK TO RISK SEEKING BEHAVIOUR Correlations highlight that CAD is not being driven by interest rates.
-A shift back to risk seeking benefits commodity currencies and weighs on the USD.
-GBP weaker on a drop in the UK’s service sector PMI.
-Norges Bank expected to keep rates on hold at 1.75%.

FX Market Update

Risk appetite has increased again in the last 12-hours, which has provided a lift to equities and commodities and put downward pressure on the USD. AUD, making up for yesterday’s losses, is strong, CAD is flat and JPY is weak.
• There is a lot of news this morning with the market looking to add back risk to their portfolios. The findings of the European Commission on Greece - see EUR section - were supportive of EUR while Moody’s has reiterated that the US’ AAA rating might be under pressure unless measures are implemented, putting downside force on the USD. However news that Fitch has downgraded two Chinese banks has dampened the rally. Ahead today will be the decision from the Norges Bank, widely expected to leave rates on hold at 1.75%, the US release of ADP employment, expected to fall 30k and the announcement from Treasury of refunding requirements. Also today will be the release of non-manufacturing ISM, whose employment subcomponent will be closely watched for hints of Friday’s non-farm release.
• For near-term traders, the most important driver is risk aversion. The VIX at 21 is trading close to its average January levels and well off its one month 28 high; G7 currency volatility at 11.6 has dropped back close to its January low of 11.4, US Treasury yields are off their recent lows and equity markets are firming. Accordingly, after spending most of January in risk aversion mode, sentiment appears to be showing early signs of shifting. Risk strategies, which were successful in 2009, like the carry trade, have soured in 2010. However, a return to risk would benefit these strategies, provide a lift to commodity currencies and weigh on the USD. The DXY (USD index) has dropped 1% from its six month high of 79.53. Support lies at the December high of 78.45, a break below here would provide confirmation that there is a shift in trend. C.S.

Americas

USDCAD (1.0578) • CAD is essentially flat to where it closed yesterday. • There is no Canadian data today, which will leave USDCAD trading off the broader US moves and commodity prices. The 30-day rolling correlation between CAD and its traditional drivers - see middle chart - highlights that in the current environment CAD has the closest relationship with equities, the broader USD move and oil prices. Two-year interest rates spreads are now negatively correlated and the VIX is highly negatively correlated at -0.84. We think this sums up what is driving USDCAD. Essentially, the market is ignoring near-term interest rates and focusing on the appetite for risk aversion, the outlook for global growth and the broader move in the USD. Over the last three sessions the market has turned increasing comfortable with adding risk to their portfolios and have turned against the USD. Accordingly, the near-term drivers for USDCAD have also turned bearish (CAD positive). Technically, USDCAD’s inability to break above 1.0750, leaves the pair firmly in range trading mode. USDCAD is currently flirting with a break back below its 100-day moving average (1.0557). Today’s pivot imply that buying pressure will emerge at 1.0528 and selling pressure at 1.0623 -see table on page 2. • The risk on the horizon for USDCAD is tomorrow’s speech by BoC Governor Carney, titled “The Economic Outlook for Canada”. Yesterday, the Bank of Canada released a working paper “What Drives Exchange Rate”, where they argue that two factors explain 46% of USDCAD movement over the medium-term: 1) relative US debt to GDP and 2) commodity prices. The explanatory power of just 46% is disappointing, however the paper still makes an interesting read - see Suggested Readings. C.S.

Europe

EURUSD (1.3996) • EURUSD is up 0.3%, currently leaving the pair with three straight days of gains. The EU has released a report on the Greek government’s proposals to address the deep fiscal problems in the country. While the EU welcomed the measures to cut the state deficit, the report also said that Greece needs to give more details on the measures, though noting that the budget program is achievable. Greece is required to submit its first deficit report in mid-March and submit quarterly deficit reports to the EU from mid-May. EUR’s reaction has been muted (though rallied leading into the report release), and there has been no EUR specific selling following the announcement. The credibility of the Greek plan remains the largest short to medium term weight on the currency. Retail sales in the Eurozone disappointed somewhat in December coming in flat versus the expectation of a 0.4% gain, however this is offset by the revision of the November drop, formerly -1.2% but revised up to -0.5%. S.T.
GBPUSD (1.5971) • Sterling has weakened significantly after early strength that took cable up 0.6%, leaving it near flat on the day. The UK’s service sector PMI fell from 56.8 to 54.5 in the month of January (see graphic). Though this leaves the sector well in expansionary mode, the index registered the largest drop since bottoming out in November of 2008. This was the catalyst that hit cable and sent it lower, keeping it clear that more than any other technical factor, it is the fundamental performance of the UK economy that leaves the market bearish on sterling. In the near term, topside resistance holds at 1.6078 for the pair, while three day uptrend at 1.5970 has been broken as we head to print. S.T.
EURNOK (8.1544) • NOK is trading down 0.1% against the euro heading into the Norges Bank’s rate announcement today. There is a wide consensus amongst economists that the Bank will keep rates on hold at 1.75% after enacting two rate increases since October. The strength in the krone against the euro (NOK has appreciated over 3.5% against EUR since the December 16th policy announcement) may constitute a key restraining factor on any potentially hawkish Norges Bank communication. S.T.

Asia / Oceania

USDJPY (90.61) • USDJPY is up 0.3% today after recovering ground in European trading and moving higher along with a broader USD appreciation. USDJPY has remained above the 90 level since early trading on Monday, while uptrend support sits at today’s intraday low at 90.08 and the downtrend off of the January 8th high sits at 90.75. S.T.
AUDUSD (0.8887) • AUD is recovering ground following yesterday’s post-RBA selloff, currently trading up 0.3% against the greenback and out ahead of the rest of the majors. Shorter term rates seem to be stabilizing after the initial impact of the RBA’s decision, however some downwards pressure still seems to be evident on rates below 1 year. S.T.

Commodities

Oil ($77.73) • Crude continues to gain rapidly, up nearly 7% since Monday’s open. Department of Energy crude inventories are expected to show a 400K increase for the week ended January 29, while gasoline inventories are expected to increase 1400K. S.T.
Gold ($1119.02) • Gold’s surge higher has been stymied by its 50-day moving average at $1125.15, though the metal’s sharp uptrend still holds. Gold’s three day upsurge has resulted in the crossover of the metal’s MACD through its signal line from below, suggesting the development of a new uptrend. S.T.

Suggested Reading

Volcker plea over Wall St shake-up, tom Braithwaite, Francesco Guerrera, FT (February 2, 2010) Ireland finds tough measures paying off, John Murray, FT (February 2, 2010) Geithner remarks on budget, FT (February 2, 2010) Focus on ways for banks to fail safely, Kevin Warsh, FT (February 2, 2010) Medicine for Europe’s sinking south, Nouriel Roubini, Arnab Das, FT (February 2, 2010) What Drives Exchange Rates?, BoC (February 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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