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HEADLINE RISK FOR EUR REMAINS HIGH
-EC President Barroso says accord has been reached, but provides no details.
-Snow storm in north-eastern US expected to play havoc with February economic data.
-Australian employment jump provides AUD a large boost.
-CNY sees its largest 2-day depreciation in some time.

FX Market Update

The Asian and European sessions allowed for an increase in risk taking. Accordingly, the USD is on weaker footing, while equities and commodities are stronger. AUD and NZD are benefiting from Australia’s surprisingly strong employment release. Headline risk is ongoing, with EC President Barroso saying that an accord has been reached and details will be provided later.
• A strategy for providing support to the weaker members of the EU is being waited on by markets. The Lisbon Treaty clearly lays out that there is to be no direct ECB guarantee or bailout, unless there are extraordinary circumstances; however there could be direct bilateral or multilateral support. Headline risk remains high and EUR is vulnerable.
• The Economist has combined three measures of risk: bond yields over growth rates, the debt-to-GDP ratio and the primary deficit/surplus to rank those countries most at risk. The top chart highlights the result - the lower the score the higher the risk associated with the country. The result isn’t surprising, but does point to several themes playing out in the market. 1) Greece is weak, but it is not alone. In many ways the market has given a window of opportunity to those countries at risk and should they fail to bring in fiscal responsibility their currencies could face a similar fate as the EUR - GBP and USD are good examples of this. 2) Canada and Australia are well positioned fiscally and we would expect their currencies to be rewarded for this in the year ahead. 3) Japan’s debt stats point to a grim picture, however most of it is internally held, which removes the risk of foreign investors. We continue to believe that sovereign issues will play a key part in currency valuation throughout 2010.
• Weather is creating some chaos for those in the north-eastern US. Trading volumes were lighter yesterday with many desks only partially staffed. In addition, worries are already circling as to the economic impact of the snow fall. The employment survey is currently being taken and accordingly could provide an odd reading, in addition there is speculation that productivity losses could be as high as $100m per day, which could play into many of the February data releases.
• Yesterday, Chairman Bernanke provided no indication of a change in timing of tighter policy, however he laid out how the Fed can bring in tighter policy. The key takeaway was that “Fed funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets”. There are several tools available to tighten policy including paying interest on bank holdings of reserves. This would put upward pressure on all short-term interest rates. In addition, at some point the discount rate will increase but this shouldn't be viewed as leading monetary tightening. C.S.

Americas

USDCAD (1.0588) • USDCAD on its way to testing its 100-day m.a. of 1.0554. A break and close below would be bearish. Regardless, for now USDCAD continues to be in range trading mode. We continue to believe that global developments to date (an ongoing global recovery, sovereign risk becoming a market focus and shifting sentiment away from the EUR) are all positives for CAD over the medium term, particularly on its non-USD crosses. We hold a year-end USDCAD target of 0.9700, EURCAD target of 1.3968 and GBPCAD target of 1.5908. The only data expected today is new housing price index, which is expected to increase 0.3% m/m. Any upside surprise will fuel speculation over the potential of a Canadian housing bubble. • For near-term traders, today’s pivot indicate that buying pressure will emerge at 1.0540 and selling pressure at 1.0675. C.S.

Europe

EURUSD (1.3716) • EURUSD had come under pressure heading into North American trading after hitting intraday resistance at 1.38. However, EUR found a bit of a bid as the European Commission President Jose Barroso has stated that an accord has been reached and that the EU presidency will announce it. Reaction has been fairly muted when compared to the impact that earlier speculation has had on EUR, but after so many false start announcements the market is likely waiting to see the details rather than reacting too proactively on only news of an imminent announcement. • The previously mentioned 1.38 level corresponds to the downtrend off of the January 14th intraday high and the beginning of the one month sharp selloff that EUR finds itself entrenched in. Trend support off of the February 5th low favours EURUSD and comes in just above 1.37. Combining this support with the 1.38 level, it appears that EURUSD is being squeezed by two opposing trendlines, with the short term perhaps likely to win out if the forthcoming announcement on Greece does enough to calm market fears. S.T.
GBPUSD (1.5617) • Cable continues to find bids in the 1.5550 to 1.5570 range which is helping it to avoid a retest of the 1.5536 low from Monday. The UK’s National Institute of Economic and Social Research’s rolling quarterly GDP estimate for the three months ended January came in at 0.4%, helping the NIESR growth estimates return once again back above their average since the beginning of 2004. Still, with Mervyn King’s comments yesterday warning that it is too early to take the QE option off the table, GBP remains stuck in a rut. Strong GBPUSD buying is helping to drive cable back to its intraday highs near 1.5660. S.T.

Asia / Oceania

USDJPY (89.63) • The yen has rapidly moved higher moving into the North American trading day after USDJPY ran into upside resistance at its 100-day moving average of 90.12. USDJPY is being squeezed between a short term uptrend off of the February 4th low and a downtrend off of the January 8th high. Today may not bring a test of these bounds with the downside bound near 89.43 and upside bound near 90.50, though USDJPY pressure as we go to print suggests that the downside is most vulnerable. S.T.
AUDUSD (0.8870) • AUD is a very large outperformer on the day up as much as 1.7% against the USD at one point. Though AUD has weakened off somewhat since peaking, it is still up a very impressive 1.4%. The catalyst for AUD’s move higher has been a much better than expected January employment result. Consensus estimates suggested a respectable 15K jobs would be added on the month when in fact a massive 52.7K print was registered. This was the largest employment increase in more than three years, though job gains (like last month) were still heavily weighted towards gains in part time employment (responsible for 70% of the increase). Interest rates in Australia jumped significantly providing upside impetus for AUD as markets reassess their RBA outlook. S.T.
USDCNY(6.8338) •The USDCNY exchange rate continues to move higher after yesterday’s surge and has pushed close to 6.8350, a level not threatened since October. Though only a marginal change over the past two days (a 0.1% yuan depreciation), on a relative basis it does appear rather significant. S.T.

Commodities

Oil ($75.33) • Crude continues to gain, helped by political tensions in the Persion Gulf related to Iran’s nuclear ambitions. Crude is also getting support from the IEA which raised its global oil demand forecast for 2010, now foreseeing 170K more barrels per day to bring total daily demand to 86.5mln barrels per day. Downtrend resistance off of the January high (just below $84) is sitting near 75.90. S.T.

Suggested Readings

Adding in the Deficit, Buttonwood, The Economist (February 4, 2010) EU Leaders to Back Greek Rescue Plan, Tony Barber, FT (February 11, 2010) Snow Throws Wet Blanket on Recovery Gauges, Kelly Evans, WSJ (February 11, 2010) A Greek Crisis is Coming to America, Niall Ferguson, FT (February 11, 2010)

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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