FOPLADE- Análisis Financiero.

Tuesday, February 23, 2010 Camilla_Sutton@scotiacapital.com Sacha_Tihanyi@scotiacapital.com

USD BID AS EQUITIES AND COMMODITIES UNDER PRESSURE

• GBP moving with EUR suggesting GBP sovereign risk remains on market’s mind.
• USDCAD downtrend still intact, 1.0470 and 1.0500 are key topside levels.
• Early signs of stabilization in EUR provided by options, shorts and CDS levels.
• Sentiment is turning rapidly against GBP; the risk is further near-term downside.

FX Market Update

Despite a good deal of USD selling in Asian and European trading, the FX market has
snapped back and nearly all majors have given up their gains against the greenback as
the dollar index has rapidly pushed back into positive territory on the day. EUR and GBP
have had wide ranging days, while AUD and NOK and JPY have been better able to
hold on to their value. The laggards today are GBP, CHF and NZD, though sterling remains
deepest in the red moving into North American trading. • The financial market
environment is not incredibly supportive of a “risk on” move today and is instead displaying
a much more neutral to negative tone as European equities are down and US
index futures are showing US equity softness. The commodity space is negative as oil is
trading back below $80 and copper is beating a hasty retreat after gaining ground earlier.
Gold has fallen precipitously as the USD surged higher. It appears that the
greenback is dictating the pace for commodities today in the absence of
any other market drivers. • The USD index (trading near 80.54) has fallen back into
the top end of the previous two week range that held before late last week’s buying
drove it higher. We now see range support at the 79.56 level, though an uptrend support
line off of the 76.93 low on January 19th has held today near the USD index’s
intraday low at 80. • The rolling one-month negative correlation between the
dollar index and global equities (as measured by the MSCI world index) has fallen
to its lowest level since early January (at –0.29), though this feature is really being
driven by the EUR and GBP components of the index as the all other major USD
pairs (save for CHF) are showing a much stronger correlation with equities. Short term
interest rates in the US have ceased to produce a meaningfully strong correlation
with the USD index, but again when looking at the impact of US short rates
against other USD pairs, the same pattern materializes. It is really only EURUSD and
GBPUSD that have seen their shorter term correlations with US short rates collapse,
other currency pairs are much stronger with USDJPY leading the way (as one would
expect from historical precedent). The lack of equity and rates correlation with
EURUSD and GBPUSD tells us that other factors are still playing a predominant
role with these pairs. It is obvious that EUR is continuing to suffer from its
crisis of confidence, but GBP seems to be moving in this direction as well. GBP is a very
likely candidate for the currency market’s next target on fiscal issues and its propensity
to show the same lack of correlations with equities and rates against
the USD that EUR is displaying (see top chart) highlights this macro risk
factor. If the risk to GBP is not obvious because most stories in the press are still more
focused on Greece and Eurozone periphery countries, this very basic study should raise
a few flags that GBP’s future is fraught with risk. S.T.

Americas

USDCAD (1.0440) • CAD is currently holding in, down 0.2% against the USD. Despite
CAD underperformance yesterday (the weakest of all majors), Friday’s push lower has
helped re-solidify the two week downtrend in USDCAD. Downtrend resistance off
of the February 9th and Friday’s intraday high comes in at 1.0470 today, but
as long as USDCAD remains below 1.05 we’d suggest the downside remains
the path of least resistance. There is added resistance coming in above that level at
1.0505 and 1.0527 with USDCAD’s 50 and 100-day moving averages. There is no data
out in Canada today, however the US will see the December S&P/Case-Shiller housing
price index as well as the February Richmond Manufacturing Index and Consumer Confidence.
S.T.

Europe
EURUSD (1.3600) • After rallying through the Asian and early European sessions, a disappointing German IFO combined with news that Greece has not provided the details of their currency hedges before the deadline have taken EUR back below yesterday’s North American close.
Today, the highlight will come from President Trichet who will speak to the European Parliament Committee on Economic and Monetary Affairs (9am EST). • There are some early signs of stabilization in the weakening EUR. Last week the net short EUR position climbed to a new record of $10bn, however the week-over-week change was marginal compared to previous weeks. This implies that there is a declining appetite to add to short positions. In the options market, risk reversals are still favouring protection against EUR downside, however they have come well off their lows. CDS levels have fallen well off their highs, with Greece now at 350bpts (high was 425), Portugal at 162 (high was 240) and Spain at 125 (high was 174). Finally, technicals are highlighting not only a loss in downside momentum, but the MACD has
generated a buy signal and is showing positive divergence - see bottom chart on page 1. Accordingly, technicals are turning increasing bullish EUR. To date, the currency has been unable to close below 1.3500, should this level continue to hold as support, we would expect EUR to stabilize and trade between 1.35 and 1.40. We hold a EUR year-end target of 1.44. C.S.
GBPUSD (1.5425) • GBP is underperforming today as the BoE’s King sounds dovish and the market is turning its focus to the negative fiscal position of the UK. In many ways, the stars
are aligning against GBP as sentiment is quickly shifting towards bearish GBP positioning.
Since last Wednesday’s release of net borrowing in January, markets have refocus on the difficult UK fiscal position. Yesterday, Kenneth Rogoff commented that eventually the US and UK will face Greece’s problems.
We think both GBP and USD are vulnerable to a swing in investor sentiment. In many ways,
the market has provided a window for countries to bring in fiscal responsibility should they
fail to do so they could easily be hit with the same fate as Greece. • Weakness in GBP is
particularly obvious against the commodity currencies, as both GBPCAD and GBPAUD are now trading at 25 year lows. However, even GBPUSD is technically weak. The currency is in a downtrend with lower lows and lower highs, the candlestick pattern is negative and the MACD remains in sell territory with no signs of positive divergence.
Accordingly, we would expect to see further GBP downside before it has the ability to stabilize. • For near-term traders today’s pivots are indicating buying
pressure will emerge at 1.5362 and selling at 1.5541. C.S.
EURCHF (1.4660) • EURCHF shot up a dramatic 50 points late in the Asian session, which introduced some speculation of intervention; however we have not seen anything that would confirm this. See middle chart on page 1. C.S.
Commodities
Oil (79.25) • In futures, as of today April has rolled to the front month, but even this hasn’t
helped to sustain oil above $80/barrel. The current rolling 45-day correlation between CAD
and oil is strong at 0.81. Accordingly oil and CAD are still moving in tandem. C.S.


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