FOPLADE- Análisis Financiero.

THE POWER OF SENTIMENT IS DISPLAYED IN EUR FX markets are quieter today; USD is generally stronger on liquidity seeking flows.
-A strong Canadian employment release provides a positive surprise for CAD.
-Nonfarm & potential of scaling back risk leading into the weekend are key risks.
-Eurozone CDS spreads continue to be pressured higher, no relief in sight for EUR.

FX Market Update

Themes from yesterday carried through the Asian and European sessions. Equities are down, commodities are weaker and the USD is generally stronger. However, FX markets seem noticeably calmer today, with AUD, CAD and NZD even gaining some ground against the USD. G7 currency vol has increased to the highest level in a month and the VIX has climbed back up to 26.
• The current downward spiral in markets stems from confidence, which makes the solution a difficult one. The markets had given Greece and the other weaker EU members a window to bring their fiscal positions into line. It has failed to do so and EUR has been punished. The fear from here is sovereign contagion to Portugal and Spain. CDS levels (or bond yield spreads over Germany) have all moved significantly higher (see middle chart) and the markets are increasingly nervous about what path lies ahead for the Eurozone and EUR. The choices are limited and complicated, but fiscal responsibility is at the heart, and that will prove difficult in the current economic environment. For the USD to stabilize markets will need a clearer understanding of what path lies ahead for the Eurozone. The other fear is that contagion moves beyond sovereign risk and into corporates, which would be a further weight for the smaller European countries to bear.
• The reaction in markets has been strength in the USD, as investors seek out the liquidity of the US capital markets. Since the USD reached its low on November 26th, it has climbed 8.2% (measured through the DXY index). However, the US should watch closely the impacts of a loss of confidence, as the markets have also provided the US with a window to become fiscally responsible and should they fail their currency could face a similar fate. A fundamental case can be made for why the current move is overdone, however for now the fundamentals matter less than sentiment and sentiment appears willing to push this move further still.
• As we enter Friday’s trading day, there might be added pressure to take risk off before the weekend, which could support the USD further. The release of nonfarm payrolls is a complication for markets. The market movement over the last few sessions has not been domestically US led, but instead simply the result of increasing fears over Eurozone sovereign risk. Accordingly, a weaker than expected nonfarm (cons. +15k) could see temporary pressure on the USD, however we think for now the key market driver will remain developments in the Eurozone. The other important factor about today’s employment release will be the annual benchmark revision, which is expected to be negative. Also important this weekend will be sideline comments from the G7. There is no statement expected, however there is speculation that currency stability will be discussed. C.S.

Americas

USDCAD (1.0722) • Canadian employment came in well above expectations at 43k and the unemployment rate fell to 8.3%. This is a solid release for CAD and provided a positive knee-jerk reaction in the currency. Accordingly as we move into the North American open CAD has gained 0.25% against the USD. However, in the last twelve hours USDCAD did break temporarily above important technical levels. As the top chart highlights, the break above 1.0750, now opens up a test of 1.0870, the November 2nd high. We continue to believe that in the medium-term the relative strength of the Canadian backdrop will support a strengthening CAD; however in the current environment fundamentals move to the background and USDCAD will continue to be pressured higher until there is some relief from the Eurozone and risk aversion abates. C.S Europe EURUSD (1.3705) • The euro is off 0.2% against the USD, and is a mid performer today. However, this does not change the fact that EURUSD remains well entrenched on its downward spiral, and has now traded temporarily below 1.37. Greek bond yields are picking up while Portuguese yields are ticking higher (Spanish yields are elevated but are currently not looking explosive). Given the degree to which EURUSD has broken down and the timeframe over which the collapse has happened, it seems like a mug’s game to try to pick support levels, though intraday 1.3650 has held. German industrial production fell 2.6% for the month of December, much worse than the 0.6%, though EUR held its ground on the news, showing that other factors are of greater importance for the currency’s fate at the moment. S.T.
EURCHF (1.4694)• The SNB has for the most part kept away from the market when compared to activity throughout 2009, however there is unconfirmed evidence that the sharp weakness in EURUSD in the Asian trading session has brought the SNB into the market to support the pair, if the subsequent price action is any indication. EURCHF spiked from near 1.4615 to 1.4830 quite instantaneously before settling lower within the previous day’s trading range.
GBPUSD (1.5721) • USD strength continues to place GBP under pressure which has pushed cable through the bottom end of the October range and is now threatening to move to the 1.55 level. Producer price inflation data for January has been released in the UK, showing a large and unexpected jump in input prices (2% m/m). Output prices gained a much more moderate 0.4% m/m, while core prices increased 0.3% m/m, as expected. While inflation in the UK seems to be surprising to the upside, it is clear from the Bank of England’s most recent monetary policy communication that the they are not overly concerned and forecast inflation to weaken off as 2010 proceeds. S.T.
EURNOK (8.2192) • Norway is off 0.4% versus the euro, after selling off following the release of weak December industrial production data (down 0.5% m/m). Weakness in commodities and a stronger USD has also pushed USDNOK through its 200-day moving average (at 5.99 today) from below. Yesterday’s USD move is providing a momentum boost to the NOK selling trend against the dollar which had been weakening of late. Support for this uptrend move in USDNOK comes in at 5.84 today, a fair distance below the current 5.9958. S.T.

Asia / Oceania

USDJPY (89.52) • USDJPY is recovering and up 0.5% today after its risk-aversion induced selloff yesterday which saw the pair pushed to its lowest level since mid December (2.1% loss). Japan’s preliminary leading indicator index increased in December to 94 from 93.5. S.T.

Commodities

Oil ($73.32) • Crude has stabilized after a massive 5% loss yesterday. There is multi-session support for crude just above the $72.40 level and the 200-day moving average comes in at $70.63 today. S.T.
Gold ($1055.43) • Gold has suffered a massive loss, taking out all near term levels of support. Longs will enter at their own risk as such a large daily loss may precipitate a new down leg as it did in early December. In the near term 1050 looks to be holding a bit of support ahead of 1025. S.T.

Suggested Reading

The race is on for Greece before the ECB exits, Gillian Tett, FT (February 4, 2010) Trichet reassures on public finances, Ralph Atkins et al., FT (February 4, 2010) Chilly response to Canada’s G7 agenda, Anna Fifield, FT (February 4, 2010) Emerging Equity Funds Post Most Outflows in 24 Weeks, Shiyin Chen, Chan Tien Hin, BB (February 5, 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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