FOPLADE- Análisis Financiero.

BANK OF ENGLAND AND ECB HOLD STEADY
-BoE indicates further asset purchases would be made should the outlook warrant them.
-Trichet press conference will be looked to for reassurance and EUR support.
-CAD looking favourable against the crosses, holding own against USD.

FX Market Update

With equities weaker and commodities lower, the USD has been able to stage a rally along with the yen, the only major to be gaining against the greenback today. CAD is hanging in quite well as are GBP and EUR while NZD, SEK and NOK lag the rest of the majors.
• Sovereign risk factors continue to play a role in the Eurozone, despite Greek bond yields stabilizing below the highs of last week. The focus is now shifting toward Portugal with the volatility in yields picking up and absolute levels moving decidedly higher. However, for the time being it seems that EUR is not being punished to any greater a degree than the other majors today against the USD on the back of sovereign concerns, though this issue remains the most pressing for the currency in the short term.
• The USD seems to have been insulated from sovereign fears over the past two months, even benefitting from the problems of other nations which seems paradoxical considering the fiscal outlook in the United States. Treasury Secretary Geithner appeared before US lawmakers yesterday and acknowledged that deficits are indeed unsustainable but that the priority will remain growth and jobs in the near term. The bond market, and deflationary forces, have so far been kind to the US, though yesterday Moody’s highlighted the risks to the US’s AAA rating and suggested that unless growth was more robust than expected or greater budget reduction measures were initiated, the debt trajectory was clearly continuously upward. Indeed, with US government forecasts suggesting a deficit average of 4.5% over the next 10 years, and the risks of trend growth coming in much lower than that, it becomes obvious (and has been for a while) that the US debt to GDP ratio is not in good shape.
• In the current environment however, it is advisable to ignore longer term currency fundamentals and trade with USD strength, particularly if one believes in a better than expected payrolls number tomorrow. However, once sovereign issues in the Eurozone move away from the forefront, we’d still look for the USD to retake its role as the world’s favourite whipping currency. Investors should look for the “perfect scenario” to once again re-enter USD shorts. This is one where short rates in the US are not moving rapidly higher (on monetary policy expectations) against those of other major currency countries, equity volatility is low and commodities are stable to gaining. S.T.

Americas

USDCAD (1.0624) • CAD is outperforming, near flat against the USD though USDCAD is still trading well above its 100-day moving average at 1.0558, a level it has been unable to close below since the pair surged higher in mid January. The Canadian Parliamentary Budget Officer has given a scathing prediction of the March 4th Federal budget, saying that the government would not provide any credible targets for deficit reduction, pointing out that there was a $20bn structural component to the deficit that would require raising revenues or cutting spending (less easy than the former in the PBO’s opinion). Still we don’t expect fiscal issues to be a drag on CAD given low debt to GDP and relatively restrained deficits when compared to the US. • A look at our short term USDCAD model suggests that a great deal of implied upside pressure on the pair has been eliminated thanks in great part the collapse in the short term rate differential since Jan. 27th, while option market risk indications, equity market conditions and commodities have all moved more supportive of CAD. While the environment still favours general USD strength, the better model indications suggest that CAD is poised for outperformance on the crosses. Indeed, since the 27th CAD has outperformed all majors save for the USD, and a solid nonfarm read will continue to benefit CAD. Today we get Ivey PMI and BoC Governor Carney will give a speech at 1:30pm ET with a press conference to follow an hour later. S.T.

Europe

EURUSD (1.3851) • EUR is a middle performer today, off 0.3% against the USD. The ECB kept rates on hold as expected, leaving the market to wait for Mr. Trichet’s press conference for comments on fiscal pressure in the Eurozone. The ECB President will likely be peppered with Greece/Portugal/Spain related questions, but will probably give the market no more than a statement of support and confidence in both the Eurozone and its constituent member. Downside EUR risk always remains and (particularly in the current environment) the press conference could do more to damage EUR sentiment than benefit if Mr. Trichet sounds even a touch negative on the fiscal prospects of the aforementioned countries. EURUSD did hit a new multi-month low today just above 1.3825, as any hint of upwards momentum in the pair earlier this week has been eliminated. Past the 1.3825 level look to 1.3750 for support. S.T.
GBPUSD (1.5880) • The BoE kept rates on hold and voted to maintain the level of asset purchases at £200bn today. The Bank continued to express belief that it is likely that inflation will fall below the target for a period of time due to the scale and persistence of the fall in output, and that credit conditions are likely to remain restrictive. Sterling has been pressured lower on a broadly stronger USD as cable has hit its lowest level (intraday) since October 13th. GBPUSD’s MACD indicates that downwards momentum continues to build, however cable has staged a bit of a recovery in the time since the BoE announcement, down only 0.1%. S.T.

Asia / Oceania

USDJPY (90.79) • USDJPY is moving lower as the yen outperforms all major currencies as equity markets in Europe weaken and US futures come off in sympathy. Yesterday’s data on Japanese/Foreign stock and bond buying from the Japanese Ministry of Finance indicated stronger yen selling pressures via portfolio outflows over the last two weeks of January, with the largest outflow since September being recorded in the last week of the month. However, these flows have as of yet not shown a great propensity to remain in the “yen selling” direction since the late January to May period of 2009 when USDJPY staged a brief recovery. S.T.
AUDUSD (0.8806) • AUD is off 0.3% but holding its ground against a good number of other majors this morning. Weaker than expected retail sales have contributed to AUD weakness overnight as December sales came in at -0.7% m/m versus expectations for a 0.2% m/m print. Downtrend resistance off of January 19th was nearly challenged yesterday and now sits near 0.8885 today. We’ve also been watching AUDCAD which also remains weighty and in a steep downtrend ahead of what looks to be strong support at the pair’s 200-day moving average at 0.9292. S.T.

Commodities

Oil ($76.38) • Crude is lower today after paring gains on larger than expected crude inventories yesterday, perhaps a welcomed pause after a 6% gain over Monday and Tuesday. S.T.
Gold ($1105.65) • Gold continues to trade away from its 50-day moving average at $1123.27. Support comes in at $1100, though the sharp intraday downtrend developed in European trading implies that this level may not hold long. S.T.

Suggested Reading

Moody’s warns US of credit rating fears, Michael Mackenzie, Gillian Tett, FT (February 3, 2010) It is the poor who pay for the weak renminbi, Arvind Subramanian, FT (February 3, 2010) In search of credibility, The Economist (February 3, 2010)



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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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