Currency Crusader

GBP Underperforms

2011-01-25T04:55:00.001-08:00

Overall, currencies remain well bid against the USD, with the Euro once again looking to extend gains to fresh yearly highs beyond 1.3700 on Tuesday. A combination of hawkish comments from ECB President Trichet and improved sentiment towards the Eurozone, in light of what appears to be a comprehensive support package, have contributed to the relative strength. Technically, while we continue to look for opportunities to buy USD’s over the medium-term, there is certainly room for additional Euro gains from here, and we eye a potential move just shy of 1.4000 before the market once again looks to roll over in favor of broader USD gains.

Relative Performance Versus USD Tuesday (As of 10:00GMT)

SWISSIE+0.24%
YEN +0.23%
KIWI+0.10%
EURO-0.11%
CAD-0.22%
AUSSIE-0.31%
STERLING-1.26%

The big story on the day has come out of the UK, with the Pound showing weakness all day and then accelerating to the downside following a much weaker than expected growth reading. This opened a drop of well over 200 points in Cable on the day and put pressure on the UK against the other major currencies as well. Of course, attempts were made to mitigate the results, with Chancellor Osborne downplaying the results of the weather impacted data. The Bank of England is in a tough position where they need to balance between the threat of rising inflation (which is very real) and a shaky economic recovery. The Sterling market had been well bid in recent days on stable economic results and higher inflation readings, but has since come back under pressure following the latest GDP result.

Elsewhere, the Australian Dollar has also been loser on the day. Although the single currency is only marginally lower on the day against the buck at this point, we continue to see relative weakness ahead, with a combination of softer economic data and narrowing yield differentials in favor of other major currencies driving the relative weakness. The latest inflation data certainly does not help the antipodean’s cause, with a much softer CPI print earlier today, providing added support for the idea that the RBA will continue to remain on hold going forward. The Australian central bank has been in a period of transition, with the RBA moving away from a hawkish monetary policy to a more balanced policy. Meanwhile, other major central banks look to be on the verge of shifting away (if they have not done so already) from super accommodative policies.

Moving on, as was widely expected, the Bank of Japan came out and left rates unchanged with the overnight call rate holding at 0-1.10%. Meanwhile, the BOJ maintained its economic assessment with economic growth in 2011, 20112 and 2013 seen growing at 3.3%, 1.6% and 2.0% respectively. Also in Japan, MOF Noda said that the 2011 budget needed to be passed by the end of March to rid deflationary concerns, but there has been some resistance within the government and the passage of the budget may prove to be a difficult task with some speculating that PM Kan will have to make some serious personnel changes in order to achieve government goals re the budget.

On the strategy side, we have been looking for opportunities to buy USD/CAD on dips in recent days, and USD/CHF is now back on our radar, with a move towards the 0.9400 figure viewed as a potential counter-trend long opportunity. We will let you know as things progress throughout the day, but right now, it looks as though our next recommendation will be in one of these two currencies.

Looking ahead, all eyes turn to Canada, where inflation data (CPI- 0.2% expected) is set for release at 12:00GMT. US Case Shiller (-0.9% expected) is then out at 14:00GMT, with consumer confidence (54.3 expected), the house price index (0.0% expected) and Richmond Fed manufacturing (23 expected) capping things off at 15:00GMT. US equity futures are marginally lower while commodities are being hit harder with oil down some 1.50% and gold off by 0.50%.

TECHNICAL OUTLOOK

EUR/USD:The recent break back above 1.3500 has signaled a shift in the short-term structure and now potentially opens the door for additional upside over the coming days back towards the 1.4000 area. Next key topside resistance comes in by 1.3745 (61.8% of Nov-Dec move, while above exposes the 78.6% fib retrace off of the same move at 1.3985. Overall however, our core bias remains net USD bullish and as such, rallies to 1.3985 this week will be aggressively sold. In the interim, a break and close back below 1.3540 will be required to relieve topside pressures.

USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.

GBP/USD: A major bearish reversal day in the works and could now confirm a fresh lower top in place by 1.6060 ahead of the next major downside extension. Tuesday’s break back below 1.5840 helps to strengthen bearish bias, while a daily close below this level will further reaffirm. From here, look for any intraday rallies to be well capped ahead of 1.5900 in favor of a drop towards next support by 1.5665 further down. Only back above 1.6060 negates.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Look for the current setbacks to be well supported on a close basis above 0.9400, with a fresh higher low sought out ahead of the next major upside extension beyond 0.9785.

TRADE OF THE DAY

GBP/CHF:While we acknowledge that on the fundamental front today’s data was certainly not pretty, we also can not ignore intraday technicals which are showing severely oversold. The daily ATR has already been well exceeded and hourly studies are violently stretched. On the daily chart we see evidence of longer-term basing, and as such we like the idea of buying into this latest dip below critical psychological barriers by 1.5000 in anticipation of a fresh higher low above the record lows set in late 2010. A key 50% fib retrace off of the latest Dec-Jan low high move and some solid previous resistance now turned support come in by the 1.4900 figure, and we will use this figure as our ideal entry for today’s trade. STRATEGY: BUY @1.4900 FOR AN OPEN OBJECTIVE; STOP 1.4730. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.

China Data Leaked

2011-01-19T08:06:00.000-08:00

Chinese Data Leak Benefits Aussie, Euro, Sterling

Risk was well bid overnight as world stocks rose to levels not seen in just shy of two and a half years. Apple released strong results and the outlook for the future is rosy given sales of the iPhone and iPad; meanwhile, IBM also impressed by delivering a better-than-expected profit on the quarter. That being said, there were some mixed results out of Goldman Sachs and Wells Fargo, which has contained the elation-driven buoyancy somewhat this morning.
In Asia, there were reports out of Hong Kong that Chinese inflation data, which will be heavily viewed this evening, is slated to come out on expectations. We’ll see if this leak proves to be true, but calming inflation in China is very positive for stocks and risk trades because it means that the government may not have to impose more tightening rules to curb growth and rising price pressures. The CPI data will be read at 9:00pm EST tonight, and if the levels deviate from the 4.7% expected (or 4.6% leaked), it will likely play a major factor in the night’s—and the rest of the week’s—sentiment.
The leak, combined with the after-the-bell earnings releases, made investors rather bullish, which saw them moving away from the US dollar to invest in emerging markets and equities rather than in bonds. The Australian dollar was one of the biggest winners on the day, cruising through parity with the US and now sitting up roughly 0.6% on the day. The EUR actually gained even more and is up close to 1% as fears over the debt problems have taken a backseat for the time being. The common currency continues to climb and now sits close to 1.35 in interbank trade. Though it is above the top end of its range, more gains could be in store if this mood continues. And finally, in the UK, the pound is struggling to remain above the 1.60 mark. It has traded above this figure a few times in the last couple of days, but seems to be consistently met with decent offers, and now sits just under this important level. Similar to the Canadian dollar (see below), traders are hesitant to push it too much higher after the gains witnessed recently. The crosses might have to catch up to the pound before it can push significantly higher against the USD.
Loonie Left Out of Risk Rally
I’d like to talk a little bit about the Canadian dollar. We highlighted the importance of the Bank of Canada decision yesterday; it is interesting to analyze the price action a day later. As noted, most currencies gained against the Big Dollar overnight due to data and risk preference, but the Canadian dollar has lagged considerably. This is both a follow-through from the less-than-hawkish statement released yesterday and proof that, with this move under par, the market has established a “fair valuation” for the near term. At these levels, there are more attractive buys in the market if you want to short the US dollar, but there is also a pervasive belief that Canada should be strong due to its fiscal situation and generally optimistic outlook.
The Bank did note that currency levels might be a drag on the economy, and this is certainly helping to fuel the anti-CAD sentiment today, but the volatility and interest in the currency has waned, leading us to believe that either new data or relative prices with the crosses must change before we see significant changes. On a more technical note, the USDCAD pair posted a bullish outside reversal today, so if the day’s price ends higher than yesterday’s close, it could signal that more short-term weakness is in store for the CAD. That being said, we do feel the general trend is in place, and any significant devaluations in the Loonie will be met with decent buying interest given the fundamentals in Canada.

Euro Close on Wednesday Critical for any Near Term Trades

2011-01-19T04:57:00.001-08:00

The Euro has finally managed to take out key topside barriers by 1.3500 on Wednesday and it will now be interesting to see how the market reacts from now into the New York close. A close back above 1.3500 will be viewed as a bullish development and likely open the door for additional upside over the coming days, potentially towards the 1.3800-1.4000 area. However, inability to close above 1.3500 will keep the prevailing structure intact and suggest that the market is still adhering to a well defined multi-day consolidation. This then could open the door for yet another topside failure and bearish resumption back below 1.3000 over the coming sessions.

Relative Performance Versus USD Wednesday (As of 11:35GMT)

EURO+0.56%
AUSSIE +0.54%
SWISSIE+0.47%
KIWI+0.44%
YEN+0.43%
STERLING+0.11%
CAD+0.08%

The primary drivers behind the latest surge in the Euro and currencies in general have been the very well bid global equity markets, commitments from Russia, China, India and Japan to buy EFSF debt to support the Euro, and an ongoing lack of concern or sense of urgency from the Fed to look to begin to tighten monetary policy despite rising inflationary pressures. On the data front, Wednesday’s session has been all about the UK, with a batch of employment data coming in across the board better than expected to keep the Pound well propped. Nevertheless, the single currency has failed to extend gains on Wednesday, even with the stronger data, and solid offers have emerged into strength ahead of 1.6100.

Looking ahead, market participants will be sure to focus on US Q4 earning results, and although we have seen some impressive showings from the likes of Apple and IBM, the more important earnings to watch remain those in the financial and banking sectors. State Street, Northern Trust, BONY Mellon, Wells Fargo and Goldman Sachs earnings will all be digested in Wednesday trade and likely to influence broader global macro price action. Meanwhile, on the economic data front, Canada manufacturing shipments (0.5% expected) are due at 13:30GMT along with US housing starts (550k expected) and building approvals (555k expected). US equity futures are slightly offered while commodities are mildly bid. It is however worth noting that the impressive move in equities has now resulted in some overbought daily technical studies which are a red flag for potential weakness in stocks over the coming days.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped below 1.3500 on a close basis ahead of some fresh weakness. The market is still very much trading within a well defined multi-week range. As such, only a close back above 1.3500 would give reason for concern and delay outlook.

USD/JPY: The market appears to be locked in some consolidation with clear directional boas not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of a previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9400 on a close basis.

FLOWS

A French and German name have been seen selling around the top in Eur/Usd with a real money account on the bid, a UK clear has been leading bids in Cable. Momentum types and an ACB seen on the offer in Usd/Cad.

Currencies Well Bid But Euro Still Capped Below Key Resistance

2011-01-18T04:23:00.000-08:00

It is good to be back on the desk after being away for a couple of days and in the end, nothing much has really changed. Overall price action in the Euro remains consolidative, with the market stalling out ahead of some key resistance by 1.3500 and rolling back over. The intense Euro rally in the previous week is now being attributed to nothing more than a major bout of profit taking on shorter-term USD long positions, and some market participants are once again back to focusing on broader Eurozone structural deficiencies. Nevertheless, the single currency has been very well supported in Tuesday trade and has found renewed interest on increased optimism over the outlook for the region (EFSF package) and some very solid data in the form of the German ZEW.

Relative Performance Versus USD Tuesday (As of 11:35GMT)

EURO+0.89%
STERLING +0.72%
SWISSIE+0.54%
AUSSIE+0.43%
CAD+0.24%
YEN+0.17%
KIWI+0.03%

If one other currency stands out at all in Tuesday trade thus far, it is most certainly the Pound, which outperforms across the board on the back of some solid data and elevated inflation readings. Nationwide consumer confidence came in much better than expected, while RICS house price data was encouraging with the data series producing less of a deterioration than consensus estimates. Meanwhile, the latest CPI readings were through the roof and have added to Sterling’s bid tone as investors start to price in the increased possibility for rate hikes. Consequently, Cable has managed to easily clear psychological barriers by 1.6000. Still, this is a market that we are much more comfortable selling into rallies rather than looking for opportunities to buy, with the overall structure tilted to the downside, and any rallies on strong data and speculation of rate hikes not expected to last.. As such, we have issued a recommendation to sell on a rally to 1.6090 today (see below).

Also on the strategy side of things, while most major currencies are well off of their respective multi-week highs against the Greenback, the Canadian Dollar has been doing its own thing and continues to trade by multi-week highs. In our opinion the currency is not likely to remain well bid for much longer, with longer-term technical and cyclical studies warning of the formation of a major top in the Canadian Dollar. In light of this, we will also be aggressively looking for opportunities to buy USD/CAD on dips into the 0.9800 area.

Elsewhere, China is back in the news as things heat up ahead of President Hu’s visit to Washington, with a Chinese spokesman warning that US lawmakers should avoid harming the overall interest in China/US trade. We will be watching developments here closely but ultimately do not expect to see anything that moves the markets too much on this end.

Looking ahead, there is some key event risk in the North American session, with the Bank of Canada set to decide on rates at 14:00GMT. While no change is expected (1.00%), we would be on the watch for any accompanying language out from the central bank that expresses concern over the relative strength in the Canadian Dollar. With USD/CAD trading by multi-week lows, we would not at all be surprised to see any comments re the strong currency open the door for a decent bout of CAD liquidation. Also out in North American trade is US Empire manufacturing (13.00 expected) at 13:30GMT, TIC flows at 14:00GMT and NAHB housing at 15:00GMT. US equity futures and gold prices are bid, while oil consolidates and trades flat on the day.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3500 range highs ahead of some fresh weakness. As such, the preferred strategy is to stand aside for now and look to sell a little higher up. Ultimately, only a close back above 1.3500 would give reason for concern and delay outlook.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of a previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9400 on a close basis.

FLOWS

An ACB and a Middle Eastern account have been on the bid in Eur/Usd. Usd/Jpy is being supported by cross demand from Japanese names. A Middle East account and a hedge fund have driven gains in Cable. Usd/Chf sales by an ACB which has been seen selling Usd’s across the board.

TRADE OF THE DAY

GBP/USD: The latest break back above 1.5910 delays bearish prospects for the time being and now opens the door for additional strength towards the key 78.6% fib retrace off of the October-November major move which comes in by 1.6090. Nevertheless, our core bias still remains bearish and any rallies into this fib retrace are viewed as a formidable sell opportunity in favor of some renewed downside pressures. A test of this level on Tuesday will also have the daily ATR well exceeded and hourly studies severely overbought to make for a very attractive entry with what should be limited downside risk. Look for a break and close back below 1.5835 to confirm bias and accelerate. A close above 1.6100 concerns.STRATEGY: SELL @1.6090 FOR AN OPEN OBJECTIVE; STOP 1.6215. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.

Risk Trade Softens

2011-01-17T07:30:00.001-08:00

Chinese Tightening Weighs On Global Markets

Last week's gains in commodities and growth sensitive currencies came to a halt over the weekend after the People's Bank of China announced that it had raised bank reserve requirements. The central bank lifted borrowing ratios by half a percent, causing the Shanghai Composite stock index to drop almost three percent. Cautious traders trimmed risk positions globally, and the US dollar gained slightly on a trade weighted basis.
After rallying almost four percent last week, the euro slipped in advance of a meeting between European finance ministers today as short covering lost momentum. The group of finance ministers is also expected to work on new rules for future budget deficits while discussing the mechanics behind a permanent aid facility. According to multiple news outlets, Germany is beginning to soften on the idea of increasing its contribution to the sovereign rescue fund and may be considering further fiscal union with the rest of the eurozone.
While weak growth will continue to weigh on investor sentiment, further economic integration could prove decisive in changing perceptions on the euro, while discord would set the exchange rate back on a downward path.
Volumes on North American markets will be light over this trading cycle, with US traders off for Martin Luther King Jr. Day. Consumer spending bellwether Apple will release fourth quarter results tomorrow, providing markets with plenty to chew on.
Bank of Canada Announcement Looms Over Loonie
North of the border, traders are preparing for tomorrow's statement from the Bank of Canada. Few expect the Bank to hike rates tomorrow, but expectations are sharply divided on what will happen farther out. Swap markets have priced in a rate hike by the end of May, and the Bank is expected to raise its forecasts for both the US and Canadian economies in the accompanying statement.
The Canadian dollar continues to pivot around the 0.99 mark against the US dollar, constrained within a relatively tight 100 basis point trading range for much of the last week.
Looking at fourth quarter data for 2010, the Canadian economy appears to have favourable momentum behind it. Trade numbers seem to be improving with US demand, and employment figures have been remarkably stable. High commodity prices are supporting export revenues.
At the same time, the Canadian economy does face challenges. Government stimulus spending is beginning to wind down, and the exchange rate is high enough to damage exporter competitiveness.
Consumer debt levels are elevated, although recent developments would suggest that Finance Minister Flaherty will soon announce tighter mortgage lending rules in order to directly target consumer borrowing – potentially later today. If this occurs, the Bank would be left to focus on achieving inflation targets more directly.
Brazil Gets Real, Intervenes in Currency Markets Again
In yet another attempt to weaken the real, Brazil’s central bank auctioned $1 billion in reverse currency swaps over the weekend. A reverse swap pays investors overnight interbank rates in reals in exchange for fixed dollar interest rates. The real fell almost a cent against the US dollar as traders assessed the bank’s commitment to holding the currency below the 1.65 level. The central bank has become one of the world’s most active, intervening repeatedly to sell the real against the US dollar. At the same time, Finance Minister Guido Mantegna has authorized the country’s sovereign wealth fund to buy dollars in the futures markets and has tripled taxes on foreign bond purchases.
Mantegna’s shootout with foreign investors and speculators is only one of many occurring in the emerging markets. Responding to a surge of speculative capital from the developed world, at least a dozen countries are attempting to devalue their own currencies relative to their competitors and the US dollar, with varying degrees of success.
Unfortunately, this means that investors are simply going farther afield, pushing capital into countries that would have been considered incredibly risky only two years ago. As the World Bank put it in a recent report, “many of these flows are short lived, volatile and sometimes speculative in nature. Left unchecked, such flows can lead to abrupt real appreciations and depreciations that are out of line with underlying fundamentals and can do lasting damage to economies.” The risk of an emerging market unwind is growing rapidly.
Hu's On First
In advance of his meeting with President Obama later this week, Chinese President Hu Jintao said that "the current international currency system is the product of the past," signalling his country's desire to see the US dollar balanced by other currencies in the years ahead. According to interviews published by the Wall Street Journal and the Washington Post over the weekend (email us for links), President Hu indicated that moves to expand the renminbi's international role will continue. He said "China has made important contribution to the world economy in terms of total economic output and trade, and the renminbi has played a role in the world economic development. But making the renminbi an international currency will be a fairly long process."
President Hu reiterated concerns about the Federal Reserve's quantitative easing programmes, saying that US monetary policy "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level." Along with many other emerging countries, China has seen much of this liquidity flow into domestic investment markets, causing sharp price rises and economic misallocations.
In discussions about Chinese inflation levels, Hu said that the problem is "on the whole moderate and controllable. We have the confidence, conditions and ability to stabilize the overall price level." He dismissed expectations that the yuan-dollar exchange rate would be increased in an effort to pressure prices, saying "inflation can hardly be the main factor in determining the exchange rate policy."
China has hiked interest rates and tightened bank lending ratios repeatedly over the last year, and is widely expected to continue doing so over the next six months. This ongoing effort represents one of the largest risks for commodity prices (and the Canadian dollar by proxy) over the months ahead. China has become the world’s largest marginal buyer of raw materials and has a significant effect on demand in many other emerging markets. Bulls are hoping that President Hu’s confidence in China’s macroprudential policies is well placed.

North American Crosses Under Pressure

2011-01-13T10:13:00.001-08:00

Both Loonie and Greenback Heavily in the Red Today

Early price action in North American markets has both the Loonie and the Greenback taking it on the chin in heavy trading as both units find themselves on the defensive—despite a mixed bag of data both at home and abroad. The USD Index is down 0.78% on the session, yet the CHF and CAD are the only majors ceding territory to the Big Dollar. Interestingly, the Swiss National Bank is actively talking down the local unit, thereby justifying its decline on the day. Meanwhile, the Loonie remains under pressure despite a better-than-expected trade balance reading and supportive flows from the $1.8 billion acquisition of the Canadian retailer Zellers by US retail giant Target.
Stateside, the USD is reeling from a surprise increase in weekly jobless claims despite a positive trade balance figure and a slightly higher-than-expected Producer Price Index. Jobless claims rose to 445K last week, largely confirming the underwhelming Non-Farm Payrolls report that was delivered the previous Friday. That said, the souring sentiment affecting the dollar has a lot to do with a somewhat more buoyant market atmosphere in Europe today, with both the Bank of England and European Central Bank choosing to hold the line on rates as expected as well as their bond purchase programs, which some market participants clearly thought would be expanded. Both the pound and euro are moving higher on the session as traders begin to trim their net short positions on both.
Spanish and Italian Bond Auctions Support Risk (at least in Europe)
European markets in general are finding support this morning from the day’s bond auctions in both Spain and Italy, which are being characterized as qualified successes. Spain was able to offer three billion euros of five-year bonds at an average yield of 4.542%, which of course represents a significant premium to comparable German paper, but a much better-than-expected interest rate. Markets had expected that Spain would be required to offer a 130 basis point increase on the debt from its last issue, but instead only saw its yield increase by 97 basis points—which is why we have chosen to term it a qualified success. At the end of the day, it is hard to call a 1% rise in your debt service a good thing in the grand scheme of things. That being said, everything is relative at this point in time, especially for the European periphery nations that find themselves in the midst of a generational fiscal squeeze. While the yield did creep up materially, the bid-to-cover ratio remained positive at 2 : 1, showing that there is still plenty of interest in Spanish paper.
Italy held a similar three billion euro five-year bond auction today in addition to another three billion via 15-year paper. As might be expected, the yields came at a lower premium, with the three-year averaging 3.67% (almost a full percent lower than that of Spain) and the longer date being offered at 5.06%. That said, while the yields were lower, so were the bid-to-cover ratios, highlighting the fact that investors still seem to have plenty of appetite for chasing yield despite the increased risk. Overall, peripheral nation yields have come down overnight on the news as interest rates have dropped eight basis points on the session, thereby allowing the market to be a bit more bullish on the currencies as well.
Finally, also supporting the euro this morning is news that the European Commission is said to be close to working out an arrangement to double the size of its EU bailout fund to 1.5 trillion EUR. Though both France and Germany have been running hot and cold on the idea of bolstering the fund’s cash reserves, it appears that the initiative is gaining steam and that the market is likely to see a final proposal in early February.
USDCAD Drifting Higher
As mentioned above, USDCAD is drifting back towards 0.99 despite some supportive fundamental influences for the currency on the day. The technicals, however, are pointing to a slight short-term retracement, as a number of factors have conspired to build a base of support for the pair in the 0.9840 area. Should the 0.99 mark be breached to the topside, one would expect the pair to continue higher to the mid-0.99 area, retracing as high as 0.9940 or 0.9960.

Are Spanish Auction Results Keeping Euro Propped Up?

2011-01-13T04:22:00.001-08:00

Although the Euro has managed to mount an impressive recovery, with the market trading well off of the multi-week lows set on Monday by 1.2875, we continue to classify the move as corrective, and fully expect to see a bearish resumption over the coming days. For now, the market has been propped by a potential EU aid package for Portugal, and solid bond auction results out of both Portugal and Spain. Also seen helping to keep the Euro somewhat bid have been comments from Germany’s Merkel who has pledged to protect the Euro with “whatever needed.” However, it is quite evident that despite efforts to intervene on behalf of the ailing Eurozone economy, there is a long road ahead which is likely to produce some unpredictable and unwelcome results. As such, we see any additional gains being well capped below the 1.3300 figure on a close basis, and would recommend considering to build into short positions on a rally towards 1.3300 (no specific trade recommendation here at the moment).

Relative Performance Versus USD Thursday (As of 11:05GMT)

KIWI+0.42%
EURO -0.01%
AUSSIE-0.02%
YEN-0.07%
STERLING-0.10%
CAD-0.22%
SWISSIE-0.69%

There is some event risk worth mention today, although we do not expect any surprises. Both the ECB and BOE are scheduled for rate decisions, and as is usually the case, the risk from the BOE comes from any changes to the QE program, while risks to the ECB decision will originate from the post decision Trichet press conference. At the end of the day, we do not expect to see any surprises from either central bank, but will be watching closely should anything materialize. While the beleaguered Eurozone peripherals are obviously problematic for the health of the Eurozone economy, we expect Trichet to downplay any such threats and maintain a less pessimistic outlook. Meanwhile, UK inflation data has been concerning of late and definitely makes it harder to justify the ultra accommodative monetary policy, but here too we do not expect any changes with the central bank still needing to focus on the current economic recovery. Data released in Europe overnight has failed to materially influence price action with German wholesale sales improving from the previous month, while UK data was mixed with industrial production slightly weaker and manufacturing production a little stronger.

Moving on, although price action in the Australian Dollar is rather subdued on Thursday thus far, we would be on the lookout for a pickup in volatility over the coming hours. While the currency still remains well bid on dips for now, the much weaker than expected employment data only helps to reaffirm our downgraded outlook for the local economy. Economic data results over the past few months are not as promising as they once were, and we continue to see risks to the downside in the Australian Dollar despite the attractive yield differentials. December jobs data showed a net gain of only 2.3k after the market had been looking for an increase of 25k. Additionally, while the unemployment rate showed a drop to 5.0% ,which was on the surface better than expected, the decline was more likely due to a lower participation rate due to a softer overall employment sector.

In terms of where the value lies at the moment and over the coming sessions, we continue to look to the Canadian Dollar as a currency that is on the verge of a sizeable depreciation. This currency has held up so well over the past few sessions, and USD/CAD trades by multi-month lows into the 0.9800’s thus far. Cyclically, the market looks to be quite stretched, and our technical studies suggest that a major trend shift is on the horizon. At this point the fundamental catalyst has yet to present itself, but we will be paying close attention. Our strategy will be to continue to look for opportunities to buy USD/CAD on overdone intraday dips in anticipation of said correction. On Wednesday we had issued a buy recommendation that never materialized, and we will once again look to be buyers at lower levels in Thursday trade if given the chance. Also on the strategy front, we have finally exited our entire EUR/CHF long position from 1.2550 at 1.2825 on Thursday for a nice profit.

Looking ahead, the BOE (unchanged 0.50% and 200B) and ECB (unchanged 1.00% expected) rate decisions filter over into the North American open at 12:00GMT and 12:45GMT respectively. The attention then shifts to North American economic data at 13:30GMT with the release of US producer prices (0.2% expected), the trade balance (-$41B expected), initial jobless claims (402k expected), continuing claims (4100k expected), and Canada international merchandise trade (-C2.0B expected). US equity futures and commodity prices are tracking lower, led by moderate declines in gold prices.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875 earlier this week, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3300 area ahead of some fresh weakness. As such, the preferred strategy is to stand aside for now and look to sell a little higher up. Ultimately, only a close back above 1.3300 would give reason for concern and delay outlook.

GBP/USD: As we had written in our commentary from previous daily analysis, the current bounce was not to be unexpected despite our bearish outlook, with the market in the process of carving out a fresh lower top below 1.5900 ahead of the next downside extension. At this point, we do not see gains extending much further and would recommend looking to consider selling rallies towards 1.5850 on Thursday.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of the previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9500 on a close basis.

FLOWS

An ACB has been selling around the day’s highs in Eur/Usd along with Middle East and Eastern European sellers. Export sales reported in Usd/Jpy with a real money account on the bid. A corporate account has been a dip buyer in Nzd/Usd.

Markets Calmed After Euro Debt Auction

2011-01-12T08:34:00.001-08:00

Portuguese Auction Gives Euro Relief

The euro found a bit of relief overnight as a much anticipated auction of Portuguese debt was fairly well subscribed. The initial results of the auction saw the EUR spike higher against the USD through the 1.30 level, only to be sold off again to settle near the 1.30 mark at the time of writing. This price action suggests that traders are still dubious as to the prospects for a workable solution to the European debt crisis and as a result there are ample offers in the market to sell EUR at levels above 1.30. Bloomberg reports that plans are in the works by the EU to put together an aid package for Portugal that would guarantee lower interest rates on bailout loans. The plan could be in the amount of 60 billion euros and would be an attempt by European lawmakers to subdue the crisis that has caused so much strife in the region. Many market participants have been questioning the health of the Eurozone due to these debt issues and the viability of the euro as a going concern has even been brought up. If these reports do come to fruition it would signal that the EU was being proactive in their attempts to contain the crisis rather than bail out nations after they get into trouble. The market wants to see a concrete plan before they embrace the euro again, so until something tangible is in place we can expect to see price action similar to today’s, where any rally in the euro is met with significant selling pressure.
M&A Talk Fuels CAD Rally
The Canadian dollar has reached a 32 month high overnight against the USD as news that Cleveland-based Cliffs Natural Resources has agreed to purchase Canadian miner Consolidated Thompson for over $4 billion in cash. The purchase will be made in Canadian dollars, so clearly the flow will be significant enough to push the USDCAD pair to a new low in the mid 0.98 cent level. The Loonie has been fairly quiet this week and intraday ranges have been tight as little in the way of Canadian (or international for that matter) data has been enough to knock the CAD from its current strong levels. From a purely technical perspective the CAD is beginning to look a little overbought and has been able to withstand changes in risk sentiment over the past few weeks with little movement. The Loonie now seems to be reacting favourably to good economic data from the US, our largest trading partner, but has also been able to withstand recent bouts of risk aversion that have seen other commodity linked currencies falter. The question on many people’s minds right now is whether or not the Loonie can stay below par for any longer. Data from Canada has been good but inflation is far from out of control, thanks in large part to the strong Loonie, so the Bank of Canada could be on hold in the near term. Secondly, an overly strong dollar is far from what our government wants as it places a big strain on our manufacturing sector causing our products to become more expensive relative to the rest of the world. For the time being it seems as if the CAD will be content to follow the news and equities in order to find direction until something tells us otherwise. Canadian trade balance figures are released tomorrow and could have a big impact should the figure come out far from expectations.
Aussie Shows Resilience
The Australian dollar is off its recent lows against the US in the 0.98 cent region even as devastating floods continue in Queensland. RBA board member McKibbin was on the tapes last night suggesting that the floods could wipe out as much as 1% of Australian GDP growth for this year. This report initially caused a selloff in the AUD but it has come back on good developments in Europe this morning. The RBA has maintained that they will be vigilant on interest rates should inflation continue to rise, and with commodity prices staying firm there is a good chance this will materialize. This tightening bias has effectively put in a floor for the AUD for now, while data and equity market developments will continue to dictate price action.
Have a great day.

USD.CAD Trade Recommendation + More

2011-01-12T04:19:00.001-08:00

There have not been a whole lot of developments on the fundamental front in recent trade and we will take the opportunity to go over broader price action which should hopefully do a good job of bringing you all up to speed. The Euro is now attempting to mount its first recovery rally in 2011, with the market basing out this week and jumping back above 1.3000. The fundamental driver for the recovery can be mostly attributed to all of the latest support from EU and commitments from Japan to help stabilize the region. However, we do not expect to see rallies extend much further before eventually running into some formidable offers as the overriding downside pressures remain intact. The fact of the matter is that the Eurozone is still very much in trouble and needing more time to sort itself out, while the US economy is looking more and more attractive. Market participants are finally starting to see the potential in USD buying not only as a safe-haven, but as an undervalued investment which could prove very rewarding once the Fed starts to reverse monetary policy.

Relative Performance Versus USD Wednesday (As of 11:35GMT)

SWISSIE +0.27%
CAD +0.24%
AUSSIE +0.22%
YEN +0.02%
STERLING-0.04%
EURO-0.06%
KIWI-0.43%

For today, market participants have been primarlly focused on the Portuguese auction results. The anticipation of the auction results had generated a lot of intraday voltility in European trade, with the Euro rallying sharply on rumors of a much better result than forecast. However, this proved to be unfortunate, with the results finally coming in quite solid but well below the blowout rumors. This then forced a sharp pullback below 1.3000 from where we have since been seeing some consolidation. The actual result showed Eur1.249B raised (originally high end of estimates; blowout rumor had been over Eur5B). Also getting some secondary atention was an internal EU Commission report proposing a new stability mechanism for sovereigns that could be funded by a bank tax.

Meanwhile, price action in the Pound has been rather boring against the buck, although we have certainly seen some relative strength against all of the other major currencies. As things stand, we do see risks for more Cable upside ahead of the Bank of England rate decision on Thursday, with the market potentially extending up towards 1.5800 before eventually finding renewed offers against the Greenback. As far as the crosses are concerned, we would recommend being less aggressive selling Eur/Gbp following the latest drop, and more focused on buying the Pound against some of the more exposed commodity currencies.

If early 2011 price action is any indication of things to come, it is becoming quite clear that what might have been a rising star in 2010, could now very well be a fading light in 2011. The Australian and New Zealand Dollars have been hit rather hard in the opening days of the new year, with the Australian Dollar standing out as the big loser. Initially, fears of a slowdown in China had begun to weigh on the higher yielding antipodean, but some softer local data and a very serious flood situation have only exacerbated matters and helped to further depress the market. Technical studies have been warning of the possibility for a major trend reversal here, and it looks as though it is finally starting to play out. By virtue of its proximity and correlated economy, the New Zealand Dollar has also been liquidated of late.

Our favorite trade for 2011 is starting to look quite promising early on, with our Eur/Aud buy recommendation already in the money and potentially on the verge of really accelerating. A closer look at the daily chart below shows the early formation of a possible double bottom, with a break back above neckline resistance at 1.3330 to confirm the setup and open a move towards a measured move objective by 1.3700 over the coming days.

Although 2 of the 3 major commodity currencies have been hit hard in recent trade, we can not call it a full on commodity bloc slaughter, with the Canadian Dollar doing a very good job of separating itself from the pack, The Canadian Dollar has actually been one of the stronger currencies of late, with the relative strength coming from a resurgence in demand for US assets which benefit the neighboring Canadian economy, along with a notable divergence in commodity price correlations. Although gold prices are still quite bid, it is oil that has emerged as an outperformer in recent trade, and when breaking down the commodity bloc, it then makes perfect sense to see the oil rich Canadian Dollar benefiting from this fact. At the end of the day, Canada neighbors a recovering US economy and should benefit from this proximity, while Australia (and to a lesser extent New Zealand) are more tied to Chinese economic growth prospects which currently are in question.

Price action in the Aud/Cad cross rate (see below) certainly paints a good picture of what we have been talking about, with the market coming under some intense pressure over the past several days to trigger a major inter-day double top formation that now projects additional weakness down towards the 0.9300 area over the coming sessions. For those worried about playing a short Aussie trade through the US Dollar or Euro, this could very well be another option that eliminates Eurozone debt exposure or further accommodative US monetary policy risks.

Nevertheless, while we certainly favor being long the Canadian Dollar relative to its commodity cousins, we still contend that the relative strength versus the US Dollar is “Loony.” At this point, the justification for this belief is purely technical, as we see longer-term cyclical studies showing Usd/Cad at a major risk for a significant trend reversal over the coming months. As is always the case, we are quite confident that the fundamental catalyst is waiting around the corner and will soon reveal itself.

Finally, we continue to see significant underperformance in the Swiss Franc going forward and it is actually quite fascinating and quite rare to have short Swiss Franc and short Aussie recommendations at the top of our list, with the two currencies traditionally so inversely correlated. We had established a short Swiss position through the Euro on Tuesday and things have paid off quite nicely already with the Eur/Chf cross surging towards key resistance by 1.2730. A break and close back above this level will officially confirm an inverse head & shoulders pattern formation (triple bottom) and accelerate gains to a measured move objective by 1.3000 over the coming days. The ability for global equity markets to stay well bid have certainly helped the trade, but we see the market racing higher no matter what happens in equities from here with technical studies so overwhelmingly stretched and due for a major upside correction. We are long from 1.2550 with an open objective and stop-loss at break-even after booking some quick profits on Tuesday.

Looking ahead to North America, US mortgage applications are out at 12:00GMT, followed by US import prices (1.2% expected) and Canada new house prices (178.0k expected) at 13:30GMT. US IBD/TIPP economic optimism (47.0 expected) is due at 15:00GMT, with oil and gas inventory shortly after at 15:30GMT. Later in the day, the US monthly budget statement (-$80B expected) is due alongside the Fed Beige Book at 19:00GMT. On the official circuit, Treasury Secretary Geithner speaks on the topic of China at 13:30GMT, while Fed Fisher (hawkish) is slated to speak at 18:00GMT on monetary policy. US equity futures and commodities prices are tracking moderately higher ahead of the US open.

TECHNICAL OUTLOOK

EUR/USD:The market remains under some intense pressure, with the latest break below key support by 1.2970 confirming a medium-term lower top by 1.3500 and opening a fresh downside extension towards next key support by 1.2585 over the coming days. Despite the latest drop, daily studies are still not quite oversold and show plenty of room for additional weakness before even considering a material bounce. As such, we expect any intraday rallies to be well capped ahead of 1.3300. Back under 1.2875 accelerates.

GBP/USD: The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however in neutral territory so we would not rule out the possibility for more of a bounce towards the 1.5800 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of the previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9500 on a close basis.

FLOWS

US Funds have been repeat buyers of Eur/Usd along with a macro account , talk of a large LHS flow through the course of the day in Eur/Gbp, Asian reserve account selling in Cable buy orders from a UK corporate for a reported dividend payment.

TRADE OF THE DAY

USD/CAD:The market has been under some intense pressure and after managing to match the 2010 lows from April on the final day of the year, has now extended declines to fresh multi-month lows into the 0.9800’s. But daily studies are starting to look a little stretched, and this in conjunction with longer-term cyclical studies which warn of a major base, leave us looking for opportunities to buy rather then selling into the downtrend. Look for a weekly close back above 1.0100 to officially relieve downside pressure and open the door for a bullish reversal. In the interim, we see setbacks well supported ahead of 0.9800 on Wednesday and will implement our ATR analysis to isolate an ideal counter-trend entry point. Should the trade trigger, hourly studies will also be well oversold which ultimately should limit any additional downside risk for the day. STRATEGY: BUY @O.9835 FOR AN OPEN OBJECTIVE; STOP 0.9685. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM NY TIME) ON WEDNESDAY.

Current Currency Rates

2011-01-11T18:15:00.001-08:00

Currency Unit	USD per Unit	Units per USD
	USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.2967476828	0.7711600439
	GBP United Kingdom Pounds	1.5601019997	0.6409837307
	CAD Canada Dollars	1.0096014882	0.9904898237
	AUD Australia Dollars	0.9870978490	1.0130707923
	JPY Japan Yen	0.0120125593	83.2462069209
	INR India Rupees	0.0221459424	45.1549987793
	NZD New Zealand Dollars	0.7601408312	1.3155456975
	CHF Switzerland Francs	1.0260920634	0.9745714207
	ZAR South Africa Rand	0.1453567802	6.8796240462

European Tension Escalates

2011-01-11T08:35:00.001-08:00

Euro Stabilizes on Intervention, Japanese Vote of Confidence

Panicked selling of Portuguese government debt drove the European Central Bank to intervene in the secondary bond markets yesterday, alleviating strain and putting a temporary floor under the euro. Later in the session, the euro moved up against the yen but exhibited surprisingly little movement against the other crosses after Japanese Finance Minister Yoshihiko Noda said that his country would use some of its foreign exchange reserves to buy European debt.
A Portuguese bailout mounted via the European Financial Stability Facility has become a near certainty in the market's eyes. A rescue of Spain is the next possibility on the horizon, but the country’s relative fiscal strength makes such an outcome slightly less probable. Belgium is rapidly moving toward crisis, with its government paralyzed, debt levels topping 100% of gross domestic product, and bond yields on a steady upward march.
The coming trading cycle should see another spike in volatility in the euro, in advance of the Portuguese debt auction. Spain and Italy are also due to sell securities on Thursday. Amid the uncertainty, many traders with large short positions will trim their exposures, while others will seek to place new bets on the currency's direction –leading to choppy trading conditions. Sharp reversals are common in this sort of environment, making it a good time to consider placing limit orders.
Aussie Falls on Flooding
The Australian dollar weakened against all of its major rivals as floodwaters threatened Brisbane, the country's third largest city. The currency is now sitting just above the .98 barrier against the US dollar, after topping 1.0225 only two weeks ago.
According to numbers released yesterday, November's trade surplus contracted as coal shipments declined in value and imports rose. Exports contribute roughly 20% of Australia's gross domestic product. Traders expect a further contraction in the weeks ahead as flooding damages mining and transportation infrastructure across Queensland state. Depending on the extent and duration of the economic damage, weakness in the Aussie may not last long, as there is little indication that this unfortunate event will substantially affect longer term growth prospects.
Interest Rate Momentum Sustaining Canadian Dollar
Canada's dollar regained ground after slipping earlier in the trading cycle, trading near the .9930 mark once more as commodities provided support and domestic bond yields continued to march higher. Traders are steadily moving benchmark interest rate hike expectations forward as conditions in the country's largest export market improve and domestic lending continues to grow.
A third of Canada's gross domestic product is generated through exports, approximately 73% of which go directly to the United States. US growth forecasts from the major banks and government bodies have been aggressively upgraded in recent months, raising hopes that Canada’s exports will gear up accordingly.
Deputy Governor of the Bank of Canada Agathe Côté was the latest in a line of policymakers to warn about consumer debt risk, highlighting the 170% growth in home equity loans over the last ten years as a particular area of concern in a speech yesterday. Home equity loans tend to be indexed to floating interest rates, making them particularly sensitive when rates rise sharply – an echo of the adjustable rate mortgages that caused so much havoc in the US economy two years ago.
The central bank raised benchmark rates in an effort to slow lending last year, and clearly remains motivated to put the brakes on further debt increases. Whether the Bank will hike rates in the face of a strong dollar and uncertain export conditions remains to be seen, but rising yield differentials are providing support for the currency at the moment. This is reminiscent of the dynamic seen early last year, which bolstered the exchange rate for almost six months before interest rates were actually increased.

Inflation Back?
After meetings in Switzerland, the traditionally inflation sensitive European Central Bank President Jean-Claude Trichet put the subject back on policymaker agendas, saying; “This is no time for complacency and the solid anchoring of inflation expectations is considered something that is important by all of us”. Trichet is remembered for hiking rates the last time that prices were rising sharply just prior to the financial crisis. He called for central bankers to maintain vigilance, saying "We have to deliver price stability and need to be credible in this delivery".
While prices are not moving as quickly as they did in 2008, inflation indicators are steadily ticking up around the planet, as economies improve and commodity prices rally. Central banks created massive amounts of new money in the wake of the financial crisis, and much of this liquidity has sloshed into the real economy over time. As Warren Buffett said in 2009; “Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation”.
Prices have skyrocketed in much of the emerging world, and annualised increases are already well above central bank comfort levels in the United Kingdom and Europe. At the same time, deflationary conditions remain entrenched in the United States and Japan.
History suggests that relatively high inflation rates tend to cause exchange rates to depreciate. When prices rise more quickly, a country’s goods become less competitive and export revenues fall. Demand for the currency drops as fewer foreign buyers purchase it, and domestic consumers sell it to buy foreign goods.
As always, markets act on expectations. High inflation expectations often lead to downward adjustments in exchange rates as traders act in anticipation of future conditions.
The seventies and eighties were marked by wide variations in inflation rates, which drove extensive dislocations in foreign exchange rates. It is difficult to know whether the modern central banking system will successfully calibrate stable inflation paths in the years ahead, but it is very likely that price expectations will once again become a large influence on global currency markets. Something to keep an eye on – particularly for corporate treasurers with dual, correlated exposures to interest rates and currencies.

Happy trading!

Major Head and Shoulders Possibility

2011-01-11T05:29:00.000-08:00

Despite some early downside pressure in Asian trade on Monday, the Euro managed to quickly shrug off the multi-month low by 1.2875 before bouncing impressively back above 1.2900. The bounce was impressive because late Sunday headlines in which France and Germany were seen putting pressure on Portugal to apply for EU/IMF aid, could have weighed much more substantially on the major currency in Monday trade. However, reports of ECB bond buying and comments from Japanese FinMin Noda of Japanese interest in Euro bonds, quickly came to the rescue and helped to prop the market, while denials from Germany’s Merkel and FinMin Schaeuble of the Sunday headlines also helped to diffuse the situation somewhat. Also out denying such rumors of a Portuguese bailout was Portugal’s PM himself who said that such talk is only helping speculators and reiterating that the country will not be applying for aid. Key short-term levels to watch above and below in the Euro now come in by 1.3025 and 1.2875 respectively. A close back above 1.3025 will relieve downside pressures, while back below 1.2875 accelerates declines.

Relative Performance Versus USD Tuesday (As of 12:00GMT)

CAD+0.17%
EURO +0.06%
STERLING+0.03%
SWISSIE-0.05%
YEN-0.36%
KIWI-0.69%
AUSSIE-0.90%

In the end, we would suggest that the risk is still very much to the downside in the Euro even in the event of any intraday rallies, with the Eurozone peripheral problems still very much alive and not likely to fade away anytime soon. Meanwhile, it is also worth paying attention to Monday’s US equity close, with the weakness in the DJIA potentially warning of some form of a top in global stocks for now. This would be a risk negative event and could very well accelerate broad based Euro declines. Much like the Greenback had been very sensitive to any negative developments while it was under intense pressure in previous years, the Euro now is in a similar position and seems very vulnerable and exposed to any hiccups within the domestic and global economy.

On the data front, the Australian trade balance came in at a surplus but slightly less than was expected. This data proved to weigh significantly on the antipodean, which has already been under pressure as the costs and damages associated with the local flood continue to escalate. In New Zealand, data was actually quite solid, with both building consents and NZIER business confidence exceeding expectations. But while Kiwi has managed to outperform its cousin on the day, the single currency remains under pressure against the USD as broader market forces dominate. Elsewhere, UK BRC retail sales fell for the first time in 8 months as bad weather wreaked havoc with consumers during the holiday period.

Moving on, Goldman Sachs is back in the news, with GSAM chairman O’Neil saying in the FT that the US could make a big comeback in 2011. O’Neil goes on to say that he believes by virtue of this fact that the US will avoid a Japanese style lost decade. While the comments could certainly help to bolster equities a bit, they also may serve the USD well, as any signs of recovery in the US will likely narrow yield differentials back in favor of the Dollar. Finally, a NY Times article entitled “Euro’s architect warns about currency’s future", has been getting some attention as Ex-ECB member Issing warns that the “Euro’s existence could be compromised unless countries find a way to impose tougher spending curbs on one another and develop a consistent fiscal policy.”

Looking ahead, the economic calendar is quite light into North America. US NFIB small business optimism (94.5 expected) is due at 12:30GMT, followed by Canada housing starts (180.0k expected) at 13:15GMT. US wholesale inventories (1.0% expected) are then out at 15:00GMT. On the official circuit, Fed Plosser speaks on the outlook for the economy at 13:30GMT, while Fed Kocherlakota takes to the stage later on in the day at 19:00GMT. US equity futures have recovered a bit and currently point to a firmer open. Commodities are also bid with gold leading.

TECHNICAL OUTLOOK

GBP/USD: The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however in neutral territory so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of the previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9500 on a close basis.

FLOWS

A well followed investment bank is said to have offers in the 1.3000 zone in Eur/Usd, Eastern European names were noted dip buyers earlier and a Middle Eastern account sales have been seen. An ACB is winning out against reported supply in Cable, a UK clearer was among the sellers. A real money account has been a noted buyer in Usd/Chf this morning to little lasting impact.

TRADE OF THE DAY

EUR/CHF:While I recognize that the entry on this trade is somewhat unconventional, I am a big fan of the trade and am really liking the way price action is unfolding here. The market had come back under some intense pressure since breaking back below 1.3000, with the declines resulting in a drop to fresh record lows below the September 1.2765 bottom to 1.2400 ahead of the latest minor bounce. However, given the intensity of the drop, we still retain a longer-term constructive outlook, and with daily studies once again showing oversold, any additional declines below 1.2400 are not expected to be sustained. The market actually looks to be carving an inverse head & shoulders baseon the hourly chart that should accelerate gains towards 1.3000 on a break back above the 1.2730 neckline over the coming sessions. The recovery back above 1.2500 and ability for the market to now consolidate the recent gains is encouraging for our reversal outlook and as such, we have established a fresh long position in anticipation of the neckline break over the coming sessions. Our stop is just under the record low.POSITION: LONG @1.2550 FOR AN OPEN OBJECTIVE; STOP 1.2390. (We are aware that risk is a little larger here in terms of points. As such, some miight be more comfortable trading the position at 0.75x leverage. For example, a $10,000 account would take a 7.5k position size here instead of a 10k position)

Current Currency Rates

2011-01-11T04:41:00.001-08:00

Currency Unit	USD per Unit	Units per USD
	USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.2949749577	0.7722157050
	GBP United Kingdom Pounds	1.5577215700	0.6419632489
	CAD Canada Dollars	1.0070308328	0.9930182547
	AUD Australia Dollars	0.9958374387	1.0041799606
	JPY Japan Yen	0.0120767154	82.8039714479
	INR India Rupees	0.0220628656	45.3250279426
	NZD New Zealand Dollars	0.7635804778	1.3096196526
	CHF Switzerland Francs	1.0329236654	0.9681257517
	ZAR South Africa Rand	0.1464558513	6.8279962279

More on Payrolls

2011-01-10T07:53:00.000-08:00

The U.S. dollar performed extremely well during the first week of 2011 thanks to stronger service and manufacturing activity and the hope that December non-farm payrolls would be strong. Unfortunately investors were sorely disappointed by the Friday's release, which showed the U.S. economy only adding 103,000 jobs last month. With the consensus forecast at 150,000 and the whisper number ranging from 300,000 to 500,000 only a handful of traders expected such weak job growth and as a result, the dollar gave back some gains.

The softer employment report created uncertainty in the forex market, making everyone realize that buying dollars is not a one-way trade. Retail sales are due for release this week and the prospect of softer consumer spending could weigh on the dollar.

Where are the Jobs?

Throughout the past year, the missing ingredient in the U.S. recovery has been jobs. As the U.S. economy stabilized, American companies stopped cutting workers but the main problem is that there has been little hiring. Before the Federal Reserve can even consider raising interest rates, the unemployment rate needs to fall below nine percent and even with the latest decline, we are long way from that point.

What's Next?

Life after non-farm payrolls may not be so bright if the reports from retailers are accurate. The holiday shopping season was supposed to be very strong but approximately half of the retailers reporting last week missed expectations. This does not bode well for the New Year especially with the profit margins of retailers being squeezed by higher commodity prices.

Fed's Conundrum

There are still too many uncertainties out there to convince the Fed to tighten before the end of the year and the prospect of weaker retail sales could cause the dollar to give back its gains as investors take profits. In the December FOMC minutes, the Federal Reserve reminded us that their dual mandate is maximum employment and price stability. Maximum employment is a very high bar that will take a long time to meet which means the Federal Reserve is still not thinking about normalizing, let alone tightening monetary policy.

Aside from the retail sales report, the trade balance, industrial production, consumer confidence and inflation numbers are also scheduled for release from the U.S. along with the Federal Reserve’s beige book report. Continued strength in U.S. economic data could help the dollar sustain its gains, but any weakness could lead to additional profit taking.

Beyond U.S. Borders

Outside of the U.S., it will also be a busy week down under. You may have heard that Australia is fighting a massive flood in Queensland, the country’s coal belt. The impact of the floods on the Australian economy has caused the Australian dollar to fall significantly along with expectations for tightening by the Reserve Bank this year.

Last week’s economic reports were also disappointing with service and manufacturing activity slowing. Should this week’s retail sales, trade and employment numbers also fall short of expectations, the Australian dollar could extend its slide. The Aussie was one of the darlings of the currency markets throughout 2010 and even though we believe that the Australian dollar will regain its legs this year, the near term shock from the flood appears to be too much for the Australian dollar to handle.

The Chart: AUD/USD

The Australian dollar / U.S. dollar currency pair is our chart of the week. See Figure 1, courtesy of GFT Dealbook. After hitting a record high on New Year’s Eve, the AUD/USD has lost more than three cents. If the currency falls below the 50-day simple moving average (SMA) at 0.9920, then the next area of support will be around 0.9735, where we have the 100-day SMA and the 23.6% Fibonacci retracement of the May to December rally. Should the AUD/USD start to recover, it will find resistance at parity (1.0), which is a former support turned resistance.

Euro Falls

2011-01-10T07:51:00.001-08:00

Unhappy New Year for the Euro

The euro slid to a four month low against both the dollar and the yen over the weekend, trading well below the 1.30 handle against the Greenback as traders worried about government bond auctions scheduled for this week. Various stress barometers in the Eurozone spiked over the last week, with yields on Portuguese and Spanish debt escalating sharply while credit default swaps on Western European debt surged. Portugal will offer bonds for sale on Wednesday, with Spain and Italy to follow on Thursday. With $43 billion in relatively risky instruments for sale, markets are expressing concerns that low demand at these auctions could lead to a further rise in borrowing costs, potentially causing another debt crisis in the common currency area.
Unless a fundamental change occurs, the year ahead is strewn with potential crisis triggers. Sovereign issuers across the European Union will be forced to roll over an unprecedented amount of debt in the face of declining creditworthiness, lowered demand and rising inflation expectations. At the same time, the political union is facing entrenched skepticism about its cohesiveness as growth rates among member countries diverge dramatically. Euro bulls may be out to pasture for some time yet.
The British pound rose to a four month high against the euro while declining slightly against the dollar as investors bet that the Bank of England would begin tightening monetary policy long before the European Central Bank. Economic growth appears to be accelerating and inflation is running close to 3.5%, well above the central bank's 2% target. Although much of this inflation has been generated by taxation increases and commodity price rallies, traders have begun pricing in a benchmark lending rate hike by the third quarter of this year.
US Economy Improves, Dollar Surges
Friday's Non-Farm Payroll report saw a 103,000 rise in the number of new positions, and a revised increase of 71,000 for the previous month. The unemployment rate ticked down to 9.4% from 9.8%.
Market expectations had coalesced around the 150,000 mark, meaning that many traders were disappointed by the headline number. However, the gain was the third in as many months, leading markets to believe that the recovery is stable and beginning to accelerate.
The US economy continues to struggle as housing market weakness, ongoing deleveraging and low consumption weigh on activity. Employment is growing, but not quickly enough to keep pace with population growth. Full employment remains a distant prospect.
However, in currency markets everything is relative.
In the year's first week of trading, the US dollar saw the largest five day gain since last summer as traders weighed the alternatives and found them lacking. Given the parlous state of credit markets in the European Union, weak growth in Japan, and rising concern about emerging market risks, the Greenback is seeing a boost from domestically driven optimism in addition to a flight to safety response.
Looking forward, Friday's release of December retail sales numbers by the US Commerce Department will be very significant for markets. This will be another consumer sentiment barometer, with large implications for the US economy as well as exporting nations such as Canada. As with last Friday's employment report, any disconnect between expectations and reality will provide fuel for volatility.
CAD and MXN Gain on Economic Optimism
Strengthening in the American economy is tremendously positive for Canada and Mexico, both of which rely on US markets for much of their export revenues. The two currencies outperformed over the last week, moving up against most of the majors, largely in sync with the US dollar. For Canada in particular, an improvement in US demand could support the manufacturing industry and would potentially help to offset the negative impact being delivered by the strong Loonie.
Oil prices are up this morning to $88.85 a barrel after an Alaskan pipeline that carries almost 15% of US was shut following a leak. The impact on the Canadian dollar has been muted thus far, as traders estimate a relatively quick return to production. Traders seem to have lost some of their appetite for the fuel, trimming long positions last week and keeping futures well contained.
The Canadian dollar is locked into an unbelievably tight trading range against the US dollar, moving fewer than 100 basis points a day (on average) over the last two months. Foreign exchange traders miss the excitement, truth be told, but for corporate hedgers, the lack of volatility is a welcome respite from the wide swings seen over the last two years.
However, a note of caution is called for. Just as winter conditions inevitably follow the Canadian summer, volatility will eventually return. Just as many drivers enter each winter unprepared, many organizations will be unprepared when exchange rates move sharply once more. Consequently, this is one of the best possible times to open internal discussions about currency risk management. Implementing an effective currency trading framework now will prove invaluable when the roads become slippery once again.
Have a great week!

Non Farm Payrolls Disappoint

2011-01-07T11:10:00.001-08:00

Currencies Scramble Post Release

Traders were left scrambling following today’s US Non-Farm Payrolls release as the print of 103K jobs added fell well short of the consensus figure of 159K. Always a big event, today’s NFP was given particular attention on the back of Wednesday’s ADP report that showed that the US economy added close to 300K jobs for the month of December. This number led many to believe that there would have been a big surprise in the figure this morning, and as a result the USD has been well supported over the past few trading sessions. After this morning’s release there were knee-jerk reactions in most major currencies, with the bias being to sell the USD and buy anything but the EUR. The AUD, NZD and GBP have all rallied close to a full cent in the first half hour following the announcement and have fully recouped any losses seen over the past few days. While the market was decidedly excited for this morning’s data, the disappointment on the miss can be tempered somewhat by the fact that it is still a fairly positive result for the US economy to add over 100K jobs in one month after all the bad press we have seen in the past number of months. Today’s print represents the first time since last spring that we have seen three consecutive positive NDF figures, while the unemployment rate actually fell three ticks to 9.4%. When put into perspective, the US economy is no longer bleeding jobs like it has been doing consistently since mid-2007, so while not a great result, today’s figure certainly cannot be considered too bad. The economic backdrop in the US does feel as if it is improving slowly, and when comparing the US to Europe one could safely say that the prospects are brighter in North America and their respective currencies reflect this as well.
Eurozone Data Disappoints
A slew of data was released in Europe overnight with several high impact figures missing the mark and adding to the woes of the common currency, bringing the EUR to a fresh four-month low against the Greenback below 1.30. First off the bat overnight were German retail sales, which fell a staggering 2.4% last month versus expectations of a 0.6% rise. Then there was the German trade balance release that came in well under the consensus 14.5 billion with a print of 11.8 billion. To top it all off industrial production was off close to a full percentage point for the month, adding fuel to the fire that is undermining the EUR. German data is especially important for Europe as they are seen as one of the only remaining engines for growth in Europe and have to be relied upon heavily to support the debt-laden peripheral economies. With Portugal being the new focus of the debt story and there still being no concrete plan from the EU, a weaker Germany will certainly not help the prospects of those countries seeking assistance. Eurozone GDP came in under consensus, showing a rise of 0.3% for the previous quarter, with unemployment staying steady at 10.1%. Following the NFP announcement the EUR tried to make a comeback but just did not have the resolve to make it back through the 1.30 level with any conviction. Traders and investors alike are clearly shunning the EUR until they see signs of improvement, and today’s data certainly doesn’t give them anything to get excited about.
Loonie Continues to Outperform
The Canadian dollar was the big winner in currencies overnight, falling from around parity down to the 0.99 level on favourable Canadian employment figures. Canada added 22K jobs for the month of December and the unemployment rate fell one notch to 7.6%, reaffirming the notion that what’s good for the US is good for Canada. Even more encouraging about today’s release was the composition of the added jobs, with full-time jobs adding 38K positions and manufacturing putting on over 65K jobs. Most of the losses came in the form of part-time positions and government jobs, showing that Canada is getting back to its old self. Canada is, after all, still a manufacturing nation, even if a lot of international attention is paid to the resource sector. The one troubling aspect here is that the current strong level of the Loonie does not lend itself well to the manufacturing sector, as our products become that much more expensive to the rest of the world. With Canadian data showing some signs of life the prospects for a rate hike by the BoC have increased, but the current strength of the Loonie is helping to temper those expectations as inflation remains subdued. The 0.99 cent level is looking like good support for USDCAD, having failed to break that level today on a few occasions.
Have a great weekend.

Payroll Figures Friday, Market Steady at this point.

2011-01-06T08:19:00.001-08:00

Markets Mixed Overnight

Equity markets were mixed overnight in Asia, though Europe has been powering ahead towards the close with gains nearing 1% across the board. The Nikkei in Tokyo hit an 8-month high with a 1.4% gain on improving local risk appetite that has been seeing capital flow into the market and the currency for a time period that is quickly approaching three quarters. Bond yields in Europe, the UK and Japan all advanced while US yields once again retraced overnight, underscoring the momentum in currency markets that saw the USD yield territory to most of the majors. At the same time, gold is suffering its fourth consecutive day of declines to now trade at $1,365.

The Canadian dollar was one of the big winners overnight, not so much on the USD but the crosses as the currency that has been lagging the broader market for months now appears to be playing catch-up given the fact that the Loonie has finally cracked and held the psychological resistance level at parity. That said, while the CAD was well supported overnight, it is coming off of its highs this morning on the release of a much softer than expected Purchasing Manager’s Index. Though the reading declined from November’s 53.3 result, purchasing activity still held the line at 50.0, which is the dividing line between expansion and contraction.
News and Notes From Around the Globe
The euro continued to trade heavily last night, briefly breaking through significant support at the 1.31 level on mixed local data that was on balance negative for the currency. Euro Zone consumer confidence for December plummeted rather abruptly while retail sales figures also disappointed in falling 0.8% in the month of November alone. German factory orders for the month of November came in much stronger than expected however, likely heading off a rout of the common currency on the day. As might be expected, it appears as though the continent’s economic data is souring in line with the ongoing public debt challenges that are being faced across the region. That said, there was a story today in a major Spanish newspaper that claimed that the Chinese were interested in making a major purchase of Spanish government paper – a story that is helping the currency to find a bid with some renewed hope that Spain will not suffer the same fate as Greece and Ireland. At the same time, it must be noted that the spread between 10-year Portuguese and German government bonds widened another 8 basis points overnight, signaling the fact that markets aren’t quite as enamored with Spain’s smaller neighbor.

The pound sterling traded more erratically than most overnight, with a nearly 1 pence swing in a short space of time on largely negative local data. Fourth quarter mortgage demand in the UK fell through the floor with an outsized decline in the final three months of the year while the UK services PMI declined unexpectedly for the first time since April 2009 in missing the market’s consensus estimate of 52.8 with a reading of 49.7 (a figure below 50 indicates a decline in activity, over 50 marks an expansion). That said, increasing yields in both the Euro Zone and UK likely delivered support to both currencies that were otherwise in a downward spiral.

Everyone’s favorite flight to safety currency, the Swiss franc, took it on the chin overnight as market risk sentiment firmed despite the fact that interest rate expectations in the country took a turn lower. Swiss CPI came in firmed than expected with a 0.2% increase over November, but the annual figure still came in at a rather anemic 0.5% year over year.

Elsewhere, Aussie building approvals came in lower than expected for the third time in the last four months, leading to further declines in the currency. In Brazil, the central bank announced measures aimed at increasing the ratio of reserves that trading houses must hold to backstop their FX trading positions.
Jobs Day Tomorrow
Traders in both Canada and the US will see employment data tomorrow and most are likely to maintain or even trim their positions ahead of the release of those figures. In this market environment, the focus of the market has been overwhelmingly focused on employment data as the leading, if not only, market indicator that matters in terms of predicting the future health of the economy. For what it is worth, initial jobless claims that are released for the US market every Thursday have been on a downtrend since late October, building the market’s expectations of a positive reading out of the US on Friday. That being said, both the market’s whisper number and consensus view have been heading northward, with the market now expecting a reading close to 160k+.

USD/CAD Long Position Established @0.9935; Stop 0.9835

2011-01-06T04:37:00.000-08:00

EUR/USD: The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. The latest topside failure above 1.3400 and subsequent sharp pullback strengthen our bias and a retest of next key short-term support by 1.3055 which guards against 1.2970 is expected over the near-term. From here, any intraday rallies should be well capped ahead of 1.3300.

USD/JPY: The latest setbacks have stalled out after the market had come under some intense pressure in the previous week to break back below the daily Ichimoku cloud and threaten a retest of the multi year lows from November 2010 just shy of 80.00. However, we have since seen a formidable bounce by the 78.6% fib retrace off of the November-December move and this could warn that the market is once again poised for a rally. Wednesday’s close back above the Ichimoku cloud (83.00) strengthens bullish prospects, while a close a sustained close above the cloud for the remainder of the week will officially confirm bullish shift. Look for any intraday pullbacks to be well supported ahead of 82.30.

GBP/USD: The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however in neutral territory so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of the previous weekly high to set up the potential for a bullish reversal week. Look for continued acceleration of gains back above parity over th coming sessions, with any setbacks expected to be well supported ahead of 0.9500.

TRADE OF THE DAY

USD/CAD: The market has been under some intense pressure, and after managing to match the 2010 lows from April on the final day of the year, has now extended declines to fresh multi-month lows just under 0.9900 on the first trading day of 2011. But daily studies are starting to look a little stretched, and this in conjunction with longer-term cyclical studies which warn of a major base, leave us looking for opportunities to buy rather then selling into the downtrend. We have used the latest pullback to previous hourly neckline resistance now turned support as our entry. POSITION: LONG @0.9935 FOR AN OPEN OBJECTIVE; STOP 0.9835.

US Employment Jumps

2011-01-05T09:35:00.001-08:00

Risk Aversion Flares to Start the Year

The risk tone has started the year with a decidedly negative tone after the run up which occurred over the thinly traded holiday season. The Fed’s comments yesterday were not viewed positively in the market; the Fed will not be deviating from its substantial stimulus programs until there is a stronger recovery apparent. Furthering the mood, stocks overnight fell in Asia due to rumours that China may levy a new tax on those with multiple homes or large estates. As we saw more and more in 2010, and undoubtedly will in 2011, what happens in China is eyed closely by the world and risk appetite, along with all markets, are affected by Chinese news. Also creating a stir, Chinese officials also noted that their buying of Spanish bonds would have to depend on market conditions, thereby stating their concern with the sovereign debt of the nation and non-unconditional support for their ability to repay the debt. In Europe, risk continued to trade heavy as headlines surface that the Swiss National Bank (SNB) will no longer accept Irish bonds as collateral. As we have said time and time again, it just doesn’t quite feel like the European debt situation is quite flushed out, and it will likely continue to be a major theme for at least the first half of 2011. The reality is, there are problems out there, but they can be contained with a generally risk accepting market (which has been the case in 2010), but if there are any negative shocks on the horizon we would first see the debt situation deteriorate and that could trigger a more widespread financial meltdown.

ADP Payrolls Jump in December

The ADP payroll numbers were released this morning and provided quite a nice surprise to the market. Although we await the much more comprehensive NFP reading on Friday (along with Canadian employment), and the December report can be discounted for seasonal factors, it was a shock to see US private employers add 297,000 jobs in December vs. a revised gain of 92,000 in November. Median guesses had the figure to be around 100,000, so there is cautious optimism for Friday’s reading. With over 15million US workers jobless, we need to start seeing some consistent job gains to signal a recovery which will filter down to GDP and inflation numbers, and at some point the stimulus and spending will have to be scaled back which puts heightened importance on seeing some positivity in the short term.
North American Currencies Strong
The heavy risk tone impacted equities as indices traded marginally red during the Asian session, and turned more negative in Europe. However, the release of the ADP number may turn the tide for NA, if traders view it more strongly than the overnight news.

However, currencies took a more divergent approach overnight. Broadly, the US Dollar was stronger, particularly making gains against the EUR, CHF, and JPY. The CHF especially was overbought and with any sustained risk aversion will continue to fall against the dollar as trader’s square positions and take profits. The EUR has pulled back considerably from December highs as much the risk aversion story seems to be focused around Europe. The fundamental and technical backdrop is making the EUR a tough buy at these levels (although things could turn around quite quickly).

The big gainer on the day was the Canadian dollar. After losing steam yesterday when liquidity returned, it has outperformed virtually every major currency today. Producer prices are on the rise, as evidenced by a stronger than expected reading this morning, but the largest cues were taken from the ADP report out of the states. The North American story is that if the US is recovering, Canada will support the efforts and saddle up for the ride. Trading around parity, there is still a buy Canada feel although shorter term risks remain to the topside for USDCAD. That being said, the downward trend is still very much intact and many would not be surprised if we made another push well over par (CAD) in the early stages of 2011.

ISM Data and Markets Rally

2011-01-04T07:57:00.000-08:00

Improving Economic Conditions Bolster Market Confidence

Global markets entered the new year in high spirits as positive economic data in the United States encouraged investors to chase yield opportunities around the world. Global equity bourses rose after the Institute for Supply Management's closely watched factory index rose to 57 from 56.6 in the previous month. This marked the highest level hit since May last year, and the latest in a line of improving readings indicating a rapid strengthening in the world's largest economy.

Large institutional investments typically enter the year with bullish bets on commodities and equities, and it appears that 2011 is no different thus far, with large amounts of money flowing into the financial markets and boosting valuations.

Interestingly, as Federal Reserve Governor Ben Bernanke foretold last year, the US dollar is rising as investors become more optimistic about domestic growth prospects. The dollar has gained almost five percent since early November on a trade weighted basis. Many "carry traders" who had borrowed in US dollars and lent into higher yielding jurisdictions over the last two years are finding themselves losing money as US bond market yields rise and the greenback appreciates. By forcing traders to exit their positions and repay borrowings, a feedback loop has been created. In essence, a rising dollar is leading to a rising dollar.

Traders will be focused on Friday's US non-farm payrolls for the next few days. Recent positive data has contributed to a rise in expectations, and markets may be skittish in the next few trading cycles as participants take profits off the table and place new positions.
Optimism Boosts Commodities and Canadian Dollar
Copper for delivery in three months surged $75 to $9,700 a metric ton, hitting a new record. Across the board, economically-sensitive commodities rose as traders bet on rising global demand in the year ahead. Base metals, agricultural commodities, and the energy sector all saw sharp advances.

Crude oil prices moved to a 27 month high, and took aim at the $100 mark after a mass of cold air from Canada threatened to chill the Eastern seaboard - potentially boosting demand. That crude oil is also one of Canada's largest exports is surely no coincidence. We sense a conspiracy afoot...
Pushed upward by positive sentiment and rising commodity prices, the Canadian dollar held its ground after hitting two-and-a-half year high against the US dollar yesterday, pivoting around the .9930 mark. In a report cited by major newspapers, Goldman Sachs forecasts a further rise in the currency, up to 0.95 against the US dollar by the end of 2011.

Statistics Canada is widely expected to show that employment rose for a third month when it releases December’s data this Friday. While these numbers are supportive of benchmark interest rate hikes, trade and debt numbers should act to constrain the Bank of Canada for some time yet.

Relative to the extreme moves seen in previous years, 2010 saw the currency remain within a tight range with the US dollar. Going into 2011, positive fundamentals should keep the currency well supported, although everything will hinge on the direction of the financial markets - which rarely experience the sort of unidirectional rally seen over the last year.
Euro Falls, Estonia Joins Common Currency Zone
The euro broke a short-lived Christmas rally, falling over the session as traders redeployed assets into more attractive growth markets. The currency had gained just over two percent against the dollar in the period between Christmas and New Year's, but lost momentum on rumors of yet another Greek downgrade from Moody’s.

Eurozone inflation rose to 2.2% during December according to harmonized numbers published by EuroStat yesterday. While this is likely too high for the European Central Bank’s taste, very few observers expect a tightening in monetary policy, given the sovereign debt backdrop.

Estonia became the 17th country to join the currency union since 1999 after successfully passing a number of financial tests and overcoming mild political opposition. Estonia has adeptly managed its recovery from the financial crisis, and the markets have been impressed with its measures to control debt and apply budgetary discipline.

The pound sterling lost almost two cents against the big dollar during Monday's session with British markets closed and liquidity at extremely low levels. This morning, the currency staged a sharp rebound after higher than expected inflation numbers were released, moving up to hit the 1.5625 mark. The December Purchasing Manager Index came in at 58.3, up from 57.5 in November, leading traders to speculate about an earlier exit from loose monetary policy this year.

The Australian dollar slipped nearly 200 basis points from Friday's peak near 1.0250 against the US dollar as traders worried about the impact of floods in the country's northeast. The flooding has shut down many roads and access to coastal ports, threatening to lower coal production and limit exports. Speculation is quickly rising about a retest of parity, although strongly positive sentiment in Asian markets should keep the currency well supported for now.

Chile Announces Currency Intervention
In a sign of things to come, Chile's central bank announced that it would intervene in currency markets, buying $12 billion US dollars in an attempt to push down the value of the peso. Chile's currency has risen 17 percent in the last six months as investors have poured funds into emerging markets and commodity linked currencies in particular.

Copper represents more than half of Chile's exports, and the red metal has been on a tear over the last year, up over 30% as supply shortages loomed and speculative interest ballooned. As this has translated into the peso's value, other export industries have been damaged and the central bank has become concerned about declining reserve values.

Currency intervention of this nature has a dubious record of success, although it did achieve short term results for Chile when it was attempted just prior to the financial crisis two years ago.

Many emerging market monetary authorities have announced measures aimed at curbing inflows and intervening in the currency markets over the last year, and more of the same can be expected in the coming months. These actions can create significant event risk for companies operating in the far flung corners of the world, going hand in hand with the significant opportunities available in the emerging markets.

Have an excellent week, and an even better year!

Reversal of Fortunes in the FX Market; Sterling Emerges as Top Performer

2011-01-04T04:11:00.001-08:00

FUNDYS

While there haven’t been too many developments on the fundamental end of things over the past few hours, we have been noticing interesting price action in some of the currencies. Markets that had been the standout outperformers in the previous week’s lightened holiday trade, have been suffering in the early year, with Aussie, Yen and Swissie all showing some relative weakness in on Tuesday. Conversely, a market that had been showing relative weakness is now the star performer. Price action in the Euro has taken a backseat for now, although the market has been able to brush off talk of another downgrade to Greece, slightly weaker German employment data, and headlines of a potential Eur45B government bond redemption, to mount a rally back above 1.3400. Broader macro flows and a higher than expected Eurozone CPI estimate seem to be more influential at the moment.

Relative Performance Versus USD Tuesday (As of 11:20GMT)

STERLING+0.87%
EURO +0.26%
CAD+0.08%
YEN-0.41%
KIWI-0.59%
AUSSIE-0.70%
SWISSIE-1.15%

Although the Pound is still trading within familiar ranges against the buck, the single currency has been on fire today (price action most evident in Gbp/Chf and Gbp/Aud), to easily trade back above 1.5600 thus far. First and foremost, a much better than expected manufacturing PMI has been seen as a major force behind some of the latest buying. Also seen helping to bolster the UK currency has been some positive flows on the back of leveraged, semi-official and model accounts, along with some positive M&A related flows. Finally, and FT survey has concluded that UK austerity measures are unlikely to send the local economy into a double dip recession.

As we look at the other side of the coin, there certainly can be some fundamental justification for the Aussie weakness on Tuesday. The Australian AIG performance of manufacturing index fell by 1.3 points to 46.3 in December, to put in the fourth consecutive month below the critical 50 boom-bust level. This has opened a major round of profit taking on long positions, with the currency backing off from post-float record highs by 1.0260. Tuesday’s early break below Monday’s low is technically significant, with the market ending a sequence of consecutive daily higher lows.

Meanwhile, technicals have played somewhat of a formidable role in the latest Usd/Jpy bounce, with the market stalling out by the 81.00 area last week, which loosely coincides with the 78.6% fib retracement off of the major November-December 2010 move. While at this point it is too early to gauge whether this latest recovery has any teeth, we would not rule out this possibility and would look for further bullish confirmation on a break back above the daily Ichimoku cloud which comes in by 83.00.

Although local fundamentals are less influential when talking about price action in the more macro weighted Swiss Franc, the weaker than expected PMIs out of Switzerland on Monday have not been helping to advance the Franc to additional record highs. But it is probably the improved global risk appetite and solid demand for global equities that have really helped to open some across the board weakness in the single currency over the past session. This is also an overextended market that is very much exposed to some corrective adjustments at a minimum.

As far as the Greenback is concerned, we continue to remain constructive with the outlook. Economic data is really starting to show signs of legitimate recovery and Monday’s strong ISM manufacturing showing is representative of this fact. Additionally, whatever the timing, Fed policy has only one way to go from here, and at some point, the shift to a less accommodative bias will ultimately benefit the US Dollar. Comments from Fed Mishkin who says that “Q3 in unlikely” and that the US economy is “stronger right now” help to strengthen our core USD bullish outlook.

Looking ahead, US factory orders (-0.2% expected) are due at 15:00GMT, followed by the release of the more highly anticipated December FOMC Minutes at 19:00GMT. Domestic vehicle sales (9.2M expected) and total vehicle sales (12.3M expected) cap things off for the day at 22:00GMT. Interestingly, US equity futures and oil prices are well bid while gold is being sold.

TECHS

EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies above 1.3400 should be used as formidable sell opportunities. Only a close back above 1.3500 negates bearish outlook. Monday’s break back below Friday’s low sets up a potential bearish reversal day and encourages bias.

USD/JPY:The latest setbacks have stalled out after the market had come under some intense pressure in the previous week to break back below the daily Ichimoku cloud and threaten a retest of the multi year lows from November 2010 just shy of 80.00. However, we have since seen a formidable bounce by the 78.6% fib retrace off of the November-December move and this could warn that the market is once again poised for a rally. Look for a break and close back above the top of the Ichimoku cloud by 83.00 to confirm.

GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however in the process of unwinding from oversold levels, so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal. But the latest topside failure ahead of 1.5700 is encouraging.

USD/CHF: The latest price action is certainly concerning for our basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Our strategy is to continue to take shots at buying, but ultimately, look for a break and close back above 0.9400 to confirm short-term reversal and relieve immediate downside pressures.

Current Currency Rates

2011-01-03T15:48:00.001-08:00

Top 10 Currencies By popularity
	Currency Unit	USD per Unit	Units per USD
	USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.3358794817	0.7485705213
	GBP United Kingdom Pounds	1.5483537409	0.6458472464
	CAD Canada Dollars	1.0076543506	0.9924037934
	AUD Australia Dollars	1.0181346500	0.9821883579
	JPY Japan Yen	0.0122446985	81.6679969969
	INR India Rupees	0.0224719101	44.5000000000
	NZD New Zealand Dollars	0.7745652895	1.2910467505
	CHF Switzerland Francs	1.0710427421	0.9336695546
	ZAR South Africa Rand	0.1510402448	6.6207519831

Top Trade of 2011

2011-01-03T07:22:00.001-08:00

With winter holidays behind us currency trading should begin to return to normal this week as everyone slowly makes their way back to office. The focus of the week is likely to center on the U.S. non-farm payrolls report due this Friday January 7 at 8:30 a.m. Traders will no doubt will want to see if the steady improvement in weekly jobless claims will finally translate into a pickup in jobs for the overall U.S. economy, lending further credibility to the bullish argument that 2011 will be another year of growth.

However, this week I thought it might be a good idea to step away from the day-to-day gyrations of the market and take a longer term view. So without further adieu, here is my top trade idea for 2011.

Long EUR/GBP

Everyone hates the euro. In fact you can probably find more fans of Julian Assange within the U.S. State department than you will find euro bulls on Wall Street. The sovereign debt crisis that plagued the single currency throughout 2010 shows no signs of easing and credit markets remain concerned about Spain which as the fourth largest economy could wreak havoc in both credit and currency markets if it were to get in trouble this year.

Indeed, if Spain faces a financing crisis in 2011, all bets are off and euro is likely to make new lows. However, Spain’s government debt is only a modest 50% of GDP and the country has made tremendous progress in controlling its spending this year, which in turn should significantly lower its borrowing needs in 2011.

The short euro trade is essentially a bet that the Euro zone will fracture, but I don’t believe that will happen for political as much as economic reasons. China will do everything in its power to preserve the euro and the current multi-polar structure of the currency market. The last thing the Chinese want to see is the return of the dollar to its primacy status as the only reserve currency in the industrialized world. With 2.8 trillion dollars in currency reserves the Chinese have the firepower to support EZ sovereign debt needs without much of a disruption the overall credit market. Worse comes to worse, they will step in and buy Spanish bonds preventing another meltdown in European sovereign debt.

I think the euro has a chance to rebound in 2011, but I believe that the safest way to play the turn is through a long EUR/GBP rather than EUR/USD trade. Although the UK economy finally saw a rebound in 2010, overall growth was tepid at best and did not turn positive until second quarter of that year.

Looking Ahead

As we enter 2011 the UK economy faces a host problems including persistently high inflation, deteriorating housing market and most important of all, the prospect of draconian budget cuts in the public sector that could curtail spending going forward. With a budget deficit of more than 10% of GDP, the UK could face a serious financing crunch in 2011.

Bottom Line

In short, I believe that markets are too sanguine about UK’s financial condition and too pessimistic about the Euro zone's credit woes. If sovereign debt problems persist in 2011, UK credit is likely to come under scrutiny as well in which case EUR/GBP will not lose much ground. See Figure 1, courtesy of FXTrek by Intellicharts.

On the other hand if credit concerns ease, the euro should stage a strong rebound and the pair could trade to .9000-.9500 by the year end. A drop below .8000 however would indicate that the euro skeptics are right and I would abandon that trade under those conditions.

EUR/CAD Long Position Established @1.3192; Stop Moved to Break-Even

2011-01-03T04:11:00.001-08:00

FUNDYS

Any weakness in the buck in the previous week of lightened holiday trade is being attributed to some stop hunting and end of year flows in the illiquid market. Already in early 2011, we are seeing the US Dollar come back into favor with the Euro erasing Friday’s gains and breaking back below Friday’s low to set up a bearish reversal day. All of the major currencies have pulled back from their respective recent highs against the Dollar, and we could very well see the Greenback come back into favor as market participants are reminded of the recovering US economy and potential for a shift in Fed monetary policy towards a less accommodative bias.

Relative Performance Versus USD Monday (As of 11:00GMT)

Predictions from IMF Blanchard who calls for a “two-speed” economic recovery in 2011 and beyond, along with comments from Center for Economics and Business Research CEO that this could be the year when the Euro weakens substantially towards parity with the USD, are further supportive of the positive outlook for the US Dollar in 2011. Meanwhile, we see ongoing risks to the Eurozone given the enormous debt burden from the peripherals, continued stress in the UK economy on shaky unemployment and softer retail sales, and potential exposure to the commodity bloc as China begins to slow down in reaction to tightening of monetary policy.

There is one currency that does however stand out in Monday trade, and that is the Canadian Dollar. The single currency had been a relative underperformer in the previous week when all of the currencies were rallying against the buck, and it appears now that these currencies have finally decided to sell off a bit, Cad is all of a sudden rallying. I guess that is why it is called the Loonie. Usd/Cad has broken to fresh multi-month lows, and has been threatening to establish below next key figure support by 0.9900. However, the price action seems more than a little odd to us, and given our longer-term core outlook for the Canadian Dollar, we view any dips below parity as unsustainable for any meaningful duration. In an attempt to take advantage of what we believe to be some less than reliable price action, we have gone ahead and established a fresh long position in Eur/Cad.

On the data front, it was all about PMIs with Swiss PMI coming in weaker than expected, German PMI around consensus and Eurozone PMI better than forecast. All else was fairly quiet and the UK holiday closure definitely contributed to the lacklustre European session. There was some focus on European equity markets which jumped out to a strong open in 2011, but this failed to materially factor into FX.

As far as our strategy and trading is concerned in 2011, we are very excited and will be making an effort to publish our open positions and account summary on a daily basis. All of our positions will be traded on an unleveraged basis, which means that the position size of each trade will be equal (or as equal as possible) to the size of the account. Therefore, if our account is set to $10,000, then the position size for each trade will be $10,000 or 10k. This will allow us to trade in a very calm relaxed and thought out manner, and give us every chance to look to reach our end of year target objective of returns in excess of 10%.

The goal is to trade in a way that will keep us in the game for the long run and give us the confidence to keep doing so, so that we can benefit from the wonderful opportunities the market offers on a day in and day out basis. We will try and look for trading opportunities every day, but if nothing sets up on a given day, we will happily go to sleep and look forward to opportunities on the next day. The market is not going anywhere and will always be waiting there for us the following day.

Looking ahead, data in the North American session is all out of the US, with ISM manufacturing (57.0 expected) and construction spending (0.2% expected) due out at 15:00GMT. US equity futures are well bid, led by gains in the Nasdaq which tracks higher by 0.85%. Meanwhile, oil is very well bid, while gold trades flat.

TECHS

EUR/USD: The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies above 1.3400 should be used as formidable sell opportunities. Only a close back above 1.3500 negates bearish outlook. Monday’s break back below Friday’s low sets up a potential bearish reversal day and encourages bias.

USD/JPY: The latest break and daily close back below the daily Ichimoku cloud and 82.00 handle is significant and certainly delays and hopes for recovery prospects. From here, the focus shifts back on the multi-year and near record lows just ahead of 80.00, with a break below to officially expose the all-time lows by 79.75 from 1995. Nevertheless, we do not recommend looking to sell at current levels given the recent thin trade, and would instead favor looking to buy into dips given the longer-term cyclical lows and likelihood for a major bullish reversal into early 2011. For now, a daily close back above 82.00 will be required to relieve downside pressures.

GBP/USD: The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however in the process of unwinding from oversold levels, so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal. But the latest topside failure ahead of 1.5700 is encouraging.

USD/CHF: The latest price action is certainly concerning for our basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Our strategy is to continue to take shots at buying on extreme intraday dips, but ultimately, look for a break back and close back above 0.9400 to confirm short-term reversal and relieve immediate downside pressures.

TRADE OF THE DAY

EUR/CAD:This morning we noticed some gross underperformance in the cross, with the Canadian Dollar price action standing out as Cad rallied across the board, while all other currencies were showing weaker against the USD. With the market dropping sharply in Asia to already exceed its daily ATR, and with no decent fundamental catalyst for the move, we were quite content on kicking off the year with a long position on the cross which was well oversold on the hourly chart. The downside risk initially seemed to be very limited, and with the other Euro/Commodity crosses showing evidence of basing, we initiated the trade. From here, a break back above Friday’s 1.3380 highs will be required to officially relieve short-term downside pressures, but we have already taken advantage of the most recent bounce into the money and have gone ahead and eliminated any risk by moving our stop-loss to break-even. POSITION: LONG @1.3192 FOR AN OPEN OBJECTIVE; REVISED STOP @1.3192.

Dollar on Defensive at End of Year

2010-12-31T09:11:00.001-08:00

Euro Continues Rebound
The EUR climbed to a two week high against the USD overnight as traders readjusted positions going into the new year and short positions were stopped out. The common currency printed a high just below the 1.34 figure which is a nice move after starting the week in the low 1.30 range, although currency movements at this time of year can be taken with a grain of salt due to the reduced levels of liquidity. Intraday moves still remain fairly erratic in most major currencies as most traders would prefer to wait until next week when business returns to normal and trading conditions improve. Coming into the new year, one of the big unknowns in FX markets will continue to be the European debt situation as investors and traders try to assess the health of the EU and the more heavily indebted peripheral economies. Up until now the EU has been more reactionary to the crisis and haven’t been able to come up with a concrete plan on how to deal with another bailout should it happen. The market seems to want the EU to be proactive and provide some sort of fund that can be used in the event of another sovereign bailout, and above all the market wants to know how big this fund will be. Until there is some more clarity on the issue it is hard to believe that the EUR will continue to make substantial gains against most major currencies as the risks to the downside are just too great.
China in Focus for 2011
China has been very much in focus in 2010 and 2011 should be no different, as the world’s most populous nation continues to throw their substantial economic weight around. The CNY finished at its strongest ever level and was up 3.4% for the year, helping to take some political pressure off the Chinese administration from the international community regarding currency manipulation. Economic data from China remains very positive on many fronts and GDP continues to grow at a torrid pace, forcing the People’s Bank of China to resort to several different methods of restricting the money supply in order to put the brakes on their red hot economy. They have done everything short of raising the benchmark interest rate but there is rampant speculation across the globe that a rate hike is inevitable, and when it comes it should be a big negative for risky assets. China is now seen as one of the main engines for global growth, so if they get aggressive on raising interest rates in 2011 it could make it a tough year for global asset markets and currencies alike, especially commodity linked currencies like the Canadian and Australian dollars.
Loonie Ends the Year on a Strong Note
The Canadian dollar continues to trade close to parity with the USD coming into year end, although it has traded in a very tight range all week. The loonie has traded better than par against the USD several times this year, but has lacked the conviction to make a substantial move lower. The CAD has only had a couple of daily closes better than parity for the year, giving proof that both speculators and corporate hedgers believe this level is a good place to be selling the loonie. The run up in commodity prices has obviously helped the CAD, but Canada cannot live by oil alone and it will take more than just a high price of crude to keep the loonie at these levels on a sustainable basis. The Bank of Canada is seemingly on hold for the next few months at least, and global growth is not looking too rosy for 2011 so the prospects for further gains are not great. The US is our biggest trading partner so until things improve south of the border we can expect the same rangebound trading for the near future in USDCAD.

Have a great weekend.