FOPLADE- Análisis Financiero.

US CAPITAL INFLOWS IMPROVING BUT CHINA BACKS OFF
• USD looking better bid after yesterday’s selling.
• US financial inflows more supportive, but official buyers back off Treasuries.
• Several asset classes break their 100-day moving averages in favour of risk taking.
• MPC votes unanimously to leave rates on hold and maintain asset purchase program.

FX Market Update

There has been solid follow through in Asian and European markets from yesterday’s
North American surge in risk appetite that provided global equities with their biggest
gain in some time, whilst sending crude oil up near 4% and copper up near 4.5%. The
commodity currencies were well bid yesterday, save for an underperforming CAD, and
EUR had its best one day gain since July 31st. Today presents a less robust picture
for the FX market, reflecting weaker, but still positive, US equity futures moving
into the North American open. SEK and NOK are gaining though the USD is generally
well supported and pushing higher against most other majors. JPY is weakest of the
bunch while EUR and CHF also struggle. There is a more neutral risk environment when
compared with yesterday’s North American trading. • A typical weight on the back of
the USD, and a factor giving many people fits over the currency’s future, is the United
States’ persistent current account deficit. While this is a factor that has a negative (if not
more abstract) implication, the greater importance for a currency’s nearer term
fortunes is a country’s ability to finance such an external deficit. We have
seen a near term improvement in monthly financial flows into the US, as depicted by the
US Treasury’s International Capital System (TIC) data. In fact, long term capital
flows for the month of December proved to be quite robust at $63.3bn,
above the average monthly net inflow level over the past six years. Furthermore, the
data shows strong net demand for US government debt (concentrated in Treasuries)
and strong net private inflows. This has helped close the gap between external financing
demand (the current account deficit) and the supply of financing as exhibited by the
TIC data (see top graphic). However, there are two caveats to be taken into account.
While there has been an improvement in the US current account deficit, the economic
recovery is likely to place pressure on it once again. This will not be a necessary USD
negative if financial flows continue to prove as supportive as they have in November
and December, however that brings us to caveat number two. It seems that China,
the most important market for US government debt when it comes to implications
for the USD, has now been a net seller of Treasury securities for
the months of November and December (at $9.3bn and $34.2bn respectively).
While December net buying of Treasury bonds and notes was robust, there was a dropoff
in official buying which was down $30.4bn as $21.9bn in Treasury bond purchases
was offset by a $52.3bn liquidation in T-bills. Should official interest in US assets wane,
and this could be taken as evidence of efforts towards reserve diversification, those
seeing an improvement in the US current account deficit as a USD positive
factor during a period of substantial expansion in new US debt issuance,
may be perceiving nothing more than a mirage. • The Fed’s Hoenig fired a stern
warning in a speech yesterday on the necessity of pre-emptive action to address the
US’s rising debt problem, or risk another crisis that could place the Fed’s independence
under sharp pressure. Today’s FOMC minutes from the January meeting, at which Mr.
Hoenig dissented, are made all the more interesting by yesterday’s speech. S.T.

Americas

USDCAD (1.0430) •USDCAD is holding near flat, leaving CAD in the upper half of majors
currencies today. USDCAD’s MACD provided a sell signal on the 11th, however we
will need to see yesterday’s intraday low near 1.0410 breached to keep the
downside momentum in the pair strong. 1.04 will be an obvious point of support
while 1.0460 holds the intraday topside level. Crude’s break higher past its 50-day m.a.
yesterday also provides CAD with further upside support. S.T.

Europe

EURUSD (1.3725) • EUR has lost 0.3% against the USD and is underperforming most of the primary currencies.
• It is noteworthy how many asset classes are attempting or have broken through their 100-
day moving averages in favour of risk taking. These include oil, S&P, gold, CAD, AUD, JPY, the VIX.
The price action hints that markets are turning and it is an early sign that high beta currencies, like CAD & AUD are preparing to rally. However, EUR continues to trade well below its 100-day moving average of 1.4531, hinting that investors are still unwilling to go materially long the currency. We also think this pattern confirms our view that the market is now separating bad news for EUR from the broader market. Accordingly, EUR rallies will still be limited by the sovereign overhang, but we could be entering a period of risk taking for other currencies. • Today, the Eurozone trade balance came in tighter than expected at 4.4bn. On a seasonally adjusted basis exports climbed 3.1%m/m and imports climbed 1.7%m/m. Accordingly the details were encouraging as they provide ongoing evidence that the recovery in Europe is taking hold. They also hint that weakness in the EUR will be an unforeseen boost to
the trade and economic backdrop. • There is increasing focus today on whether or not the investment bank-ers who underwrote the recent Greek bond issues had any responsibility to report previously entered into currency swaps. These swaps used historical exchange rates, thereby allowing an upfront cash payment to Greece, which many view as adding to the country’s
debt burden. Regardless of the responsibility owed, this issue should have only a limited
impact on EUR. The more important issue is waiting for the March 16th deadline for Greece
to comply with its austerity measures. C.S.
GBPUSD (1.5750) • After several economic releases, sterling is trading very close to esterday’s
North American close. The minutes from the February 3rd and 4th MPC meeting revealed that the vote to leave the asset purchase program at £200bn was unanimous.

There appears to have been discussions on both sides, but the committee decided that with the option to increase it at a later date leaving it unchanged was the best course of immediate action. Also released today was an as expected unemployment rate of 7.8% and a rise in jobless claims to 23.5k. Sterling has only had a muted reaction to the releases. C.S.

Asia / Oceania

USDJPY (90.70) • USDJPY has broken above its 100-day moving average (90.15) and is now testing its 50-day (90.75). • Yesterday’s TIC data highlighted that for the first time in almost 2-years, Japan’s holdings of US Treasurys has surpassed China’s - see chart on page 1. This reflects more on the drop in China’s holdings, but is still an important development. • Japan’s Finance Minister has stated that they are aiming for an inflation rate of 1%. This is the first time the ministry has specifically named a target. The BoJ will release its interest rate decision today in tomorrow’s Asian session. They are widely expected to remain on hold at 0.1%. C.S.

Commodities

Oil (77.30) • In a positive development for oil, the commodity has broken and closed above
its 100-day moving average of 75.95. The current rolling 45-day correlation between oil
and CAD is high at 0.82, implying that positive developments in oil prices are having a similar
impact on CAD levels. C.S.
Gold (1118.60) • Gold in EUR (814.73) has reached a new high, and in USD it has broken
above its 100-day moving average of 1103.30.C.S.

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