FOPLADE- Análisis Financiero.

RISK APPETITE INCREASES; PRESSURING THE USD LOWER

• Solid earnings from Barclays & reassurance from the EU have increased risk appetite.
• Speculators record largest ever net short EUR position but remain net long CAD.
• Inflation hits 3.5% in UK, Bank of England not concerned about temporary factors.
• German investor confidence continues to increase slowly.

FX Market Update

Markets were thin yesterday with the combination of North American and Asian holidays
(China is closed all week as it rings in the New Year). Since Friday’s close the
USD has weakened, with AUD gaining 0.7%, CAD up 0.4% and EUR up 0.1%. Risk
aversion has moved to the background as the combination of strong earnings from
Barclays and ongoing attempts by the EU to soothe fears over Greece have eased investors
concerns. Accordingly commodities are stronger, with oil making an attempt to
break up above its 100-day moving average of 75.85, and equities are firm as we move
into the North American open. • Today’s net long-term TIC flows are expected to increase
$35.4b and will be closely watched for changes in flows from the foreign official
sector and China in particular - see top chart. • Friday’s weekly CFTC speculative
positioning data showed that the net short EUR position has reached a new
all time high of $9.9bn. With sentiment so extreme it cautions that the market is
vulnerable to short covering, which would exaggerate a move higher in EUR. The net
long CAD position dropped down to just $0.8bn (8.9k contracts). It is encouraging that
CAD traders remain net long and it implies that speculators have removed some risk
from their portfolios, but still favour CAD in terms of sentiment. C.S.

Americas

USDCAD (1.0460) • CAD has gained ground against the USD today, but is underperforming
the other commodity currencies. USDCAD has broken below its 50 and 100-day
moving averages (1.0519 and 1.0542, respectively) and is trading at the lowest level in
18 sessions. These are all bearish indications and provide further evidence
that USDCAD is going to favour the bottom half of its range this week. A
close below 1.0464 (January 20th’s close) and a crossing of the 9-day moving average
below the 21-day (1.0605 and 1.0588, respectively) would provide added downside
pressure to USDCAD as would oil breaking above its 100-day moving average of 75.85.
However, these events would simply provide confirmation of what we believe are already
sufficient bearish technical signals to be short USDCAD on a near-term
basis. • Today’s announcement by Finance Minister Flaherty (8am EST) where he is
expected to provide the details behind plans to bring in tighter real estate lending
rules, including an affordability test, could be offsetting some of the more positive
developments we have seen for CAD. The M&A front is favouring a weaker USDCAD,
as both BP and Reliance Industries reported to be considering a $1.2bn to $2.0bn stake
in the Canadian oil sands’ Value Creation. • On a year-to-date basis, there are only
three currencies to have gained against the USD. These are JPY, which has benefited
from risk aversion; MXN which has recovered from negative sentiment at the end of
2009 and improving US fundamentals and CAD, which has managed to gain 1%, even
as other commodity currencies have weakened. As we look out to year-end, we
expect CAD will continue to outperform for many reasons: 1) improving fundamentals
in the US are good for the Canadian economic backdrop; 2) on a relative basis
Canada outperforms on almost every measure, including economic, fiscal and the aftershocks
from the financial crisis; 3) there is limited sovereign risk in Canada; 4) there is a
global appetite for Canadian assets - both as a diversification and a commodity play;
and 5) sentiment towards CAD remains positive. Accordingly, we have made no change
to our forecast that CAD will reach parity mid-year and appreciate through
here by year-end. We hold a year-end 0.97 USDCAD forecast. C.S.

Europe
EURUSD (1.3651) • EUR is finding itself supported today, but by no greater a degree than other well performing majors against a weaker USD, as EURUSD gains 0.4%. EUR has been buoyed by the more positive trading environment today, though CFTC speculative positioning data including information available up to last Tuesday (when EURUSD briefly jumped higher) showed a record net speculative short EUR position at -57K contracts ($9.9bn). Though it appears that longs had reentered the market somewhat, they were no match for the continuingly large build in shorts. This of course raises the risk of a sharp short squeeze in EURUSD as positioning remains extremely stretched. However, there is still little risk that policymakers in the European Union will provide the impetus for such a move in the short term as talk remains mildly supportive, but very stern regarding Greece’s fiscal problems. Gradual demonstration by Greece that it is willing and able to meet its fiscal responsibilities and hold to its plan of fiscal austerity seems to be the only thing that can provide the market with comfort. Over the past three sessions, Greek spreads to German bonds (10-year) have shot back higher and now stand near 330bps. EURUSD has tested close to downtrend resistance off of the January 14th intraday high, near 1.3690 today. The market has been unable to push EURUSD past 1.36 for
an extended period of time over the past two sessions, though Friday’s price action keeps 1.3550 and below a threat. S.T.
GBPUSD (1.5697) • Sterling is an underperformer, up only 0.2% against the USD and is showing no propensity to break out of its eight session trading range bounded by 1.5536 and 1.5776, though it appears that 1.5650 is supportive in the short term. Inflation in the UK rose 3.5% y/y in the month of January, the highest rate of price increase since November of 2008. In a published letter to Chancellor Darling, BoE Governor King pointed to short term factors such as the restoration of the VAT to 17.5% and oil prices (up 70% from one year ago) as the key reasons as to why prices have breached more than 1% higher than the Bank’s target rate, though the impact of a weaker currency was still feeding through to prices. The Bank foresees that the effect of these factors on inflation will be temporary and expects the impact of spare economic capacity to “bear down on inflationary pressure over time,” predicting that inflation will fall back to the target in H2 of 2010. Upside and downside inflation risks always exist, but at this point in time it seems that Bank of England is still predominantly concerned
with downside inflation pressures more than the short term upside pressures currently being seen.
S.T.

Asia / Oceania

USDJPY (89.90) • USDJPY is trading near flat after yen strength disintegrated heading into
North American trading. The yen has not benefitted to a great degree from better than expected
Q4 GDP data which came in at 1.1% quarter over quarter. The upside surprise (from the 0.9%
expected) fully offset the downward revision to the prior quarter’s 0.3% gain to 0% growth.
Perhaps the most notable result was the drop in Japan’s GDP deflator which crumbled to
-3% y/y, a record rate of contraction in this broad measure of prices. The Bank of
Japan meets to decide on policy late today and expectations are that it will keep policy on hold.
Look for topside resistance to come in at the 100-day moving average in USDJPY at
90.13 today, corresponding to the downtrend off of the January 8th intraday high in the pair.
S.T.
AUDUSD (0.8937) • AUD is up solidly today, gaining 0.7% against the USD. The RBA’s minutes
from its most recent meeting suggested that rate increases would likely to be necessary if
economic conditions continued to improve as expected, but that rate increases were not
required at every meeting. AUDUSD has rebounded soundly away from its 200-day moving
average (at 0.8623 today) towards its 50- day which holds at 0.8988. Uptrend support for
the pair off of the Feb. 9th intraday low comes in a bit below 0.89 and should keep AUDUSD
above that level through the remainder of today’s session should pro-risk market conditions
hold. S.T.

Plaza Group.


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