FOPLADE- Análisis Financiero.

FOCUS SHIFTS TO CHAIRMAN BERNANKE

• Market is likely to shift back to risk taking, once Bernanke’s report is behind us.
• No Canadian data leaves USDCAD trading off of broader market themes.
• Eurozone industrial orders surprise to the upside, helping buoy EURUSD.
• Options market shows GBP risk sentiment well placed to the downside.

FX Market Update

Markets are mixed as they await Fed Chairman Bernanke’s testimony. A soft Portuguese
bond auction, rumours that the ECB will extend the availability of
unlimited funds at the March meeting and the soft US consumer confidence
release are the focus as we move into the North American open. US equities are
close to flat, oil is weaker and the USD is mixed, with EUR, NOK and CHF outperforming,
CAD, GBP and JPY flat and AUD and NZD underperforming. • Today’s highlight will
come with Bernanke’s semi-annual report to the House Financial Services
Committee, where he is expected to reiterate that the increase in the discount rate
should not be construed as tightening or bringing forward the timing of tighter monetary
policy. In addition, he is likely to spend some time on exit strategies, the path of the
recovery to date and unemployment. A shift away from emergency level overnight rates,
towards higher interest rates is rapidly approaching. The USD has already rallied on the
expectation that relative interest rates will move in its favour. From here it is the magnitude
of interest rate hikes that will be important for currencies. Scotia Economics is
forecasting that the first interest rate hike will come in Q3 and that by yearend
both US and Canadian overnight rates will be at 1.25%. This is more
aggressive than the market and accordingly should it come to fruition will have a
currency impact. • The market’s muted reaction to yesterday’s US Treasury announcement
that it was restarting the supplementary financing program
was appropriate. The decision was simply reinstating a program that had been halted
as the debt ceiling approached; however now that it has been raised, the Treasury will
once again begin issuing T-bills to finance some of the Fed’s activities. • Since November
26th (the recent low in the USD), there has been a clear pattern in
returns. MXN and CAD have outperformed, JPY and GBP have been mid performers
and EUR has underperformed, losing 10% - see top chart. As we look out to midyear,
we expect CAD to continue to lead markets in performance. The combination
of low sovereign risk, a relatively strong economic base and favourable sentiment
should support the currency. EUR is showing early signs of stabilizing, which
should limit further downside and see it enter more of a range bound trading pattern.
Finally, we expect GBP will now enter a phase of underperforming EUR as the
market increasingly turns its attention to the UK’s underlying fiscal issues combined
with a dovish sounding central bank. • Purchasing power parity (PPP) is a difficult
tool for FX traders to use, as a currency can remain over or undervalued for years. However
it can be used to signal extremes and trends in the market. The middle chart
highlights that EUR’s PPP has dropped from its high of 28 in April 2008
(anything over 20% is considered extremely overvalued), to 15% today. This brings the
PPP valuation of EUR more in line with many of the other currencies (CHF is at 14%,
CAD is at 11%). C.S.

Americas

USDCAD (1.0583) • Yesterday’s round of risk aversion pressured USDCAD to break and
close above its 100-day moving average of 1.0528 and took several technical studies
closer to buy signals. A disappointing development for USDCAD bears. There is no
data expected from Canada until Friday, which will leave USDCAD trading off of
broader market trends. We would expect that once the risk of Chairman Bernanke’s
report has passed USDCAD will favour the downside (a stronger CAD).
C.S.

Europe
EURUSD (1.3543) • EURUSD traded down to 1.35 yesterday but has managed to remain above that level today as EUR is up 0.3% against the USD. EURUSD has not closed below the 1.35 price point since May of last year, and even under the massive pressure the currency has experienced so far in 2010, the pair’s ability to sustain closes above that price point is encouraging. Indicators of downside pressure on EUR have stabilized somewhat, though the market remains very short the currency. One should look for intraday support first at the 1.35 level and then near last week’s lows around 1.3450. • EUR’s fortunes have been boosted today by a much better than expected read on December industrial new orders which rose 0.8% m/m against expectations of a 1% decline. Even more impressive was the increase in the November estimate which was revised up from 1.6% m/m to 2.7% m/m. Essentially we have a constructive EURUSD outlook from current levels given the pace and degree of decline. However, sentiment is the prime driver of EURUSD at the moment, and without a definite turn, stabilization may be the best that can be
hoped for in the very near term. S.T.
GBPUSD (1.5440) • Sterling is holding its ground and benefitting from USD weakness today, gaining 0.1% against the greenback. Bank of England policymaker Adam Posen remarked today that he believes that there is no reason to think the pound will move a lot from currently levels. Though he and his colleagues at the Bank of England have left the door open to additional quantitative easing, he also stated that those betting that inflation would be higher over the
next decades would lose money. • Cable looks quite heavy with the trade through 1.55, though 1.54 has been supportive over the past two sessions. GBPUSD risk reversals are ticking lower, with the premium paid for puts over calls reaching near an 11- month year high (see graphic). Downside pressure remains ahead of the UK’s second (detailed) Q4 GDP estimate due on Friday with markets expecting a very modest 0.2% q/q rate of growth. S.T.

Asia / Oceania

USDJPY (90.05) • The yen continues to gain ground against the USD, up 0.2% in today’s trading following yesterday’s 1% surge higher on risk aversion and yields. January Japanese merchandise exports grew at their most rapid pace in 30 years, up 40.9% y/y (though in line with expectations). The rebound in exports is crucial for helping to boost Japan’s growth engine and fight deflationary pressures, an encouraging sign in the face of a historically strong yen. Uptrend support for USDJPY has been broken with yesterday’s push lower, neutralizing the short term trend. Intraday downtrend resistance for USDJPY looks to keep the pair pressured below the 90.50 to 90.30 range through North American trading. S.T.
AUDUSD (0.8891) • AUD is one of the weakest performing currencies today, down 0.3% against the USD as the pair came under pressure with European equity selling. Wage growth data from Q4 2009 came in at 0.6% q/q, the lowest quarterly rate of growth in almost a decade (the market
expected a still historically weak read of 0.8% q/q). AUDUSD failed on a test of yesterday’s
100-day moving average at 0.9071 and has pushed intraday below support near 0.8880.
Look for the 0.8850 to 0.8860 range to show some congestion ahead of 0.8800. S.T.

Commodities

Oil ($78.68) • Crude is losing ground yet again today, though uptrend support on oil’s most
recent surge is coming in a hair above $77 on the daily charts. S.T.




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