FOPLADE- Análisis Financiero.


MARKET WATCHING CLOSELY FOR SIGNS OF REVERSAL Evidence that sentiment is shifting has not materialized, but could be on the horizon.

-CAD set to outperform on its crosses due to its strong relative position.
-No major US or Canadian data as markets await tomorrow’s testimony by Bernanke.
-EURUSD’s 50-day m.a. crosses 200-day m.a. from above with bearish implications.
-NZD stabilizing, speculative positioning remains positive but trend is bearish.

FX Market Update

The USD is on weaker footing as we move into the North American open. NZD and AUD are outperforming and JPY is lagging. Markets continue to be nervous, though they appear to be calmer today with equities turning positive, commodities stronger and bond yields higher.
• The end to the current bout of risk aversion and USD strength could come abruptly or it could take weeks if not months to end. If the EU provides markets with a clear strategy for how it will handle weaker members going forward, we would expect to see stabilization in markets. However, without a significant event that changes the course of investors’ appetite it will be more difficult to pick the top in the USD rally. We are watching the following closely for signs that market sentiment is shifting back towards risk seeking, which could signal the end of the USD rally: 1) EUR failing to react to negative developments; 2) A stabilization in the CFTC weekly EUR short position; 3) Evidence that both the VIX and currency vol are no longer rising; 4) A shift in the option markets which pushes risk reversals higher (see top chart); or 5) a break in the USD index (DXY) uptrend. We have yet to see concrete evidence that at least some of these are materializing, however we will continue to monitor them closely.
• Today there is a USD40bn 3-year auction. Many are worried that there will be a crowding out effect with the large auctions that the US is required to host in order to finance their deficit. Essentially the supply of US paper will depress the demand for other sovereign paper, which will increase financing costs for some already vulnerable nations. This is a real concern going forward.
• In a regulatory filling, China’s CIC has reported that it owns $9.6bn in US listed companies - see chart. Removing the $3.5bn attributed to Teck Resources, an inter-listed Canadian company, the CIC has reported that it owns $6.1bn in US listed stock, which accounts for just 2% of its $300bn portfolio. This is a small holding and provides further evidence that CIC is weary of investing in US assets. We anticipate that Canadian assets will continue to be attractive to CIC and China generally, which will support CAD over the medium term.
• Today there is only limited economic data and no Fed speakers, however the market is increasingly focused on what Chairman Bernanke will say tomorrow when he testifies on exit strategies to the House. C.S.

Americas

USDCAD (1.0703) • CAD is a mid-performer today, having gained 0.6% against the USD. Technically, the outlook for USDCAD’s is still fairly rangy, though the recent close above resistance at 1.0750 has opened up a potential test to 1.0870, the November high. Today, USDCAD is trading between its 100 and 200-day moving averages (1.0559 and 1.0848, respectively). Since the USD rally began in late November, CAD has lost ground against the USD, but has gained on its crosses. We expect CAD to continue to outperform on its crosses as on a relative position the currency is well placed. With smaller deficits, minimal sovereign risk, and a reasonable plan for fiscal responsibility, Canada is well placed in the current risk averse environment. Additionally, the relative economic outlook, favourable sentiment and the commodity base, leave CAD with the potential to outperform on its crosses over the next 12-months. Accordingly, we continue to be biased to be long CAD against EUR and GBP and believe that in the medium term and once this bout of risk aversion passes CAD will also outperform the USD. C.S.

Europe

EURUSD (1.3725) • EUR is getting a boost from the fairly broad based USD selling, trading with a 1.37 handle and up 0.6% on the day. While general market sentiment is certainly more positive, EUR is not a large outperformer despite the speculation swirling around ECB President Trichet’s early departure from meetings in Australia in order to attend an EU meeting in Europe. This has raised market hopes that perhaps something much more concrete than just rhetoric will be applied to the Greek problem and finally put a firm floor under EURUSD. However, it was later confirmed that this was simply a scheduling change that was purely logistic in nature. This comes just as EURUSD’s 50-day moving average crossed its 200-day from above, tellingly bearish of the EUR meltdown that has cost the currency more than 4.5% against the USD since briefly stabilizing in the mid-December to mid-January period. Downtrend resistance on this move comes in at 1.3875 today while intraday trend support off of last Friday’s low in the high 1.35’s holds at 1.3643 but may keep EURUSD supported above the 1.3680-1.3690 range through the end of the day. S.T.
GBPUSD (1.5598) • Sterling has seen its Asian trading session gains reversed as GBPUSD has been pushed into negative territory, though the pair is struggling to hold near flat. Weaker trade data has not helped GBP’s case, nor has the British Retail Consortium January Sales Monitor which expanded at its slowest annual pace in 15 years. Cable remains pressured towards the 1.55 level with intraday support hanging at 1.5562. S.T.

Asia / Oceania

USDJPY (89.66) • USDJPY had gained through Asian and European trading, weakening briefly into North American trading as equities turned south and US futures temporarily came off their session highs (now reversed). While the strong persistent correlation between USDJPY and rate spreads is well established (the 2-year differential correlation with the pair currently sits at 0.80), global equity/USDJPY co-movements have strengthened considerably from late January. The rolling one month correlation between USDJPY and the MSCI World equity index has increased steadily and now sits at a multi-month high of 0.85, exemplifying how recent equity weakness has been very good for JPY’s fortunes. The January read on the Japanese Economy Watchers Survey outlook component jumped back higher to 41.9, reversing with certainty the decline of the past few months on improved sentiment. S.T.
NZDUSD (0.6912) • The kiwi is leading the pack today, up 1.1% against the USD and holding a fairly wide margin over the rest of the majors as financial and commodity markets are showing stability today. NZDUSD has traded around its 200-day moving average for the past three sessions and is finding support above the 0.68 level. However, the downtrend is still far from looking neutralized and we’ll need to see additional stability in the pair to gain confidence that longs would be justified. Accordingly, we have seen sentiment towards NZD weaken over the previous two weeks (ended Tuesday) as speculative positioning on NZDUSD has moved sharply less bullish (see graphic) as long NZD positions have rapidly liquidated while shorts have entered the market. On the economic front, New Zealand’s Prime Minister John Key has suggested that the government is considering cuts to personal income tax (offset with a higher sales tax) in order to encourage investment and growth. S.T.

Commodities

Oil ($72.28) • Crude stabilized yesterday above $71/barrel and is only now beginning to develop a touch of an upwards trend today as the barrel trades over $72 for the most extended period of time since collapsing on Friday. S.T.
Gold ($1067.20) • Gold continues to show stability following the heavy selling last Thursday and Friday that pushed the metal to trend support formed off of the April lows near $865. Adding to the importance of this level as support is its correspondence to the 50% Fibonacci retracement of the April double bottom basing at $865.50. This is a line in the sand for the metal, and should bears push past here, expect $1026.70 and $1000 to be the next downside targets. S.T.

Suggested Reading

CIC Offers A Glimpse Into US Holdings, Dinny McMahon, WSJ (February 9, 2010) No Exit in Sight for US as Fannie, Freddie Flail, Nick Timiraos and James Hagerty, WSJ (February 9, 2010) Debt Ills, Rate Plan Hammer Markets, Peter McKay and E.S. Browning, WSJ (February 9, 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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