FOPLADE- Análisis Financiero.

FX MARKET WAITING ON NEWS FROM EUROPE
-Firm support for Greece presents the potential for a risk rally and USD selling.
-Snowstorms delay Bernanke’s appearance today, though speech still to be released.
-BoE’s inflation report highlights that it is too early to call an end to QE; GBP drops.
-Chinese exports disappoint, but still grow 21% y/y.

FX Market Update

European equities are pushing significantly higher, showing the bounce that North America did yesterday as it appeared that there might be some positive resolution to the Greek issue. This has not completely translated to the same extreme one-way price action that was evident in the FX market late yesterday, as today the USD generally trades near flat against all but SEK which has a solid lead. For those majors losing ground to the USD, losses are not large, except for the GBP which is the worst performing major. US yields are slightly lower, though the real story is the collapse in Greek yields which have fallen precipitously over the past two sessions (including today) as the 10-year Greek government bond has fallen by nearly 80bps cumulatively since the close on the 8th on potential bailout news, a pattern also reflected in Portuguese and Spanish bond yields.
•The sovereign risk time bomb that is the Eurozone periphery has been the biggest single market driver in recent sessions, and yesterday’s market price action, not only in FX, shows just how much asset prices have been impacted by the ongoing concerns as conflicting news of an imminent bailout, or a lack thereof (see EUR section), drove a see-sawing of asset prices. The lack of a single consistent voice to communicate to broader markets the progression of efforts to resolve the Greek issue is cause for concern as FX markets risk being whipsawed around further. It wouldn’t be advisable to take anything less than an official statement as certain evidence of a bailout in trading not only EUR based currency pairs, but any USD or JPY pair given the propensity of the latter two to trade with risk sentiment.
• Severe winter weather has all but shut down the Washington political machine, impacting Congress and Fed Chairman Bernanke’s planned hearing which was to take place today. Though Mr. Bernanke will not be appearing in person today (his appearance will be rescheduled), the text of his testimony will still be released at 10:00am ET.
• Will the resolution of the Greek issue lead to a reversal of the USD’s fortunes? The dollar buying trend has far surpassed any such similar move over the past few months. One needs to look back to December ‘08-early March ‘09 for a comparable rally, with risk being the main driver of that move as well. We’ve laid out the conditions which we think are necessary (though perhaps not sufficient) for a USD selloff to resume, but we would caution taking the resolution of Greece’s sovereign risk problems as the key event, though it would certainly help overall market sentiment. A Greek-specific bailout in a framework that doesn’t lay out a similar mechanism of support should markets begin to seriously pressure Portugal or Spain, could keep questions of uncertainty over the Eurozone on the front burner and still provide enough of a dose of risk aversion to keep the USD supported. The one ameliorating factor to such a scenario is that, the other periphery Eurozone countries do not suffer from the same credibility deficit (currently) as Greece and thus the implication of support for the weakest link in the chain may be enough to strengthen the whole, providing an environment supportive of a weaker USD. S.T.

Americas

USDCAD (1.0650) • CAD is performing reasonably well on its crosses and USDCAD briefly traded through support at 1.0650 but has since fallen back to flat on the day. CAD still stands to outperform when the USD is well supported, and underperform somewhat in a large risk rally as witnessed yesterday afternoon. The market will see US and Canadian December trade data today, with expectations of a -$35.8bn deficit in the former and a -$0.1bn deficit in the latter. S.T.

Europe

EURUSD (1.3775) • EUR is entering the North American open essentially where it closed. Rumours of a potential EU bailout continue to swirl, but there has yet to be any official word that such a strategy has been agreed to. With the markets now expecting a support strategy, the EU is in some ways has painted itself into a box. • Over the last month the EUR market has moved into an extreme short position, which leaves the currency vulnerable to exaggerated moves fueled by short covering. Yesterday was a good example of how EUR is vulnerable. When rumours spread that the EU would announce a strategy to support the weaker members, EUR jumped 130 points, when the rumours were denied, EUR fell back 50 points. Many traders have done well on the recent drop in EUR and will be eager to lock in profits. Accordingly, should the EU announce a strategy at the conclusion of this week’s summit, EUR will be vulnerable to upside. With fears of financial market instability and contagion a key concern for the EU, it seems reasonable that they will provide a strategy to help Greece. There are several options available, including an EU or a bilateral loan to Greece or an EU guarantee provided to Greece. Technically, the charts have improved over the last two sessions, but remain in bearish territory. Resistance lies at the downward trend line of 1.4191, followed by the 200-day moving average of 1.4354. Both of these levels will be significant levels for the currency to breach. Support lies at the recent low of 1.3586. For near-term traders, pivots today suggest that buying will emerge at 1.3674, while selling pressure will come at 1.3870. C.S.
GBPUSD (1.5660) • Sterling has dropped 100 points on the release of the BoE’s quarterly inflation report. The highlights include a decrease in its projection of economic growth and a reiteration that though inflation will rise above target in the near term (due to the impact of VAT and petrol prices), that it will fall back into range due to ongoing spare capacity. In addition, it was made clear that it is too early to declare that the need and appetite for quantitative easing has passed. C.S.

Asia / Oceania

USDCNY (6.8320) • There was a significant shift in the CNY in the last 12-hours, with the currency losing 0.1% against the USD and moving back above 6.83. This is the largest one day move in yuan since May 2009. • The Asian Times is reporting that SAFE has said that USD denominated risk assets (including ABS and corporates) are no longer desired and that holdings should be made up of Treasuries and US agency debt. • China released disappointing January trade data today. Exports climbed 21% y/y (cons. 28%) however in dollar terms fell from $131bn to $109bn month over month - see chart on page 1. On a brighter note, imports rose 86% y/y and climbed month over month, which implies that domestic demand is strong and that the Chinese growth story remains intact. • Currently, the market is pricing in 2.2% appreciation of the yuan over the next 12-month. C.S.

Commodities

Oil (74.18) • The 200-day moving average (70.96) has held well as support and the commodity is now trading between there and its 100-day at 75.73. The rolling 45-day correlation between oil and CAD is high at 0.79. We take this as evidence that currency traders are sensitive to the outlook for global growth. C.S.

Suggested Reading

Europe Weighs Rescue Plan, D. Crawford, M. Karnitchnig, C. Forelle, WSJ (February 10, 2010) Why Greece Could Stymie Obama’s Plans, Kelly Evans, WSJ (February 10, 2010) BoE Quarterly Inflation Report, BoE (February 10, 2010) Berlin looks to build Greek ‘firewall’, FT Reporters, FT (February 9, 2010) The US can no long go it alone with China, Jeffrey Garten, FT (February 8, 2010) Larrain Seeks to Double Chile’s Growth as Next Finance Minister, Sebastian Boyd, BB (February 10, 2009)

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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