GLOBAL FX STRATEGY CURRENCY STRATEGISTS

Daily Foreign Exchange Update Camilla Sutton, CFA, CMT

(416) 866-5470
Sacha Tihanyi
(416) 862-3154
Camilla_Sutton@scotiacapital.com Sacha_Tihanyi@scotiacapital.com
Thursday, July 29, 2010

USD WEAK ACROSS THE BOARD ON FISCAL RUMBLINGS

EURUSD BREAKING KEY TOPSIDE TECHNICAL LEVELS
• California calls a budgetary state of emergency, Moody’s looks dimly on US AAA.
• NZD underperforming on RBNZ Governor Bollard’s dovish outlook.
• EURUSD breaks key 1.3050 topside level.
• Beige Book shows some growth momentum deceleration ahead of US Q2 GDP data.

FX Market Update - Markets are stronger today after yesterday’s North American
session weakness, with US equity futures pointing to a solid open in the black. Com-
modities are also better supported, putting a bid into AUD and NOK which are outper-
forming the rest of the majors today. NZD is the weakest major following the dovish
comments from the RBNZ after yesterday’s interest rate increase, while GBP is also
underperforming on weaker consumer lending data. S.T.

US Fiscal Cracks Showing? - Yesterday’s declaration by California Governor Arnold

Schwarzenegger of a state of emergency in California didn’t exactly dominate the head-
lines, despite the fact that without a budget (1 month overdue), the state is projected to
run out of cash by October (at the latest). The market is discounting the probability that
the state actually goes bust (we’d see a much much weaker USD right now if it wasn’t)
and assuming a workable budget will be in place before then, but the size of Califor- GER-US YIELD SHIFT <—> GROWTH MOMENTUM DIVERGENCE
nia’s economy and the delay in the fiscal process reminds us of the US national fiscal
situation. On that front, there is a very interesting interview with a senior Moody’s
sovereign debt analyst in the Wall Street Journal (see suggested readings). It intro-
duces the potential for the rating agency to examine the solidity of the
United States’ AAA debt rating, should the government's current projec-
tions for the country’s debt and interest burden be realized. We continue to
be concerned over the lack of anything more than lip service by government officials
being paid towards the need for US fiscal consolidation, instead using double-dip reces-
sion fears as a buffer to political pressures. The euro's outperformance against the USD
today, with a break of the 1.3050 level, reminds us that the USD can no longer rely
on the sovereign risks of others to bolster its fortunes and keep govern-
ment bond yields restrained. S.T.

More USD-Negative Growth Deceleration - The anecdotal evidence in the Beige

Book from the Fed’s 12 regional districts suggested that recent economic activity in the
US saw only a modest pace of increase. Ten of the twelve districts reported rising activ-
ity, though of those 10, two suggested recent slowing in the pace of growth. The other
two districts not reporting an increase in growth (Cleveland and Kansas City) showed a
flat growth profile. This is setting a tone of concern ahead of the advanced Q2 US FISCAL ACCOUNTS ON AN UNSUSTAINABLE TREND
GDP read on Friday, with the market currently expecting a 2.5% q/q print. Today’s
initial jobless claims are expected to show a 460K print, essentially in line with the aver-
age weekly level thus far in 2010, following the stabilization in claims after a decline
from a peak of around 650K in Q1 2009. With growth sensitivities high, the persistence
in claims at higher elevated leaves risk sentiment somewhat vulnerable today. S.T.

Americas
USDCAD (1.0313) • CAD is performing well as commodities have found some stability
following more Asian equity gains, up 0.7% against the USD. Broad based USD selling
has helped USDCAD regain some downside initiative after two day’s of upwards drift.
The 1.04 level is still holding the topside, while support at the 50-day (1.0305) is once
again being tested today. The key downside region in the pair is in the 1.0266
to 1.0278 range, where three month-plus uptrend support resides, with this
trend constituting the bottom end of the pair’s consolidating symmetrical triangle pat-
tern. The topside downtrend of this triangle remains well above the current short term
trading range at 1.0575. We expect USDCAD’s trading range to hold between 1.0277
and 1.0370. S.T.
GLOBAL FX STRATEGY Thursday, July 29, 2010

Europe in the pair has evolved. Though we are not

EURUSD (1.3087) • EUR is an underperformer today, despite being up 0.6% against a rather weak USD, incredibly bullish on the Eurozone economy
however EURUSD’s price action has been constructive. The 1.3050 level gave way in European trading, with and expect it to be outperformed by the US
an upwards drift in the pair evident since the breach. Thus EURUSD continues to trade in the upper end of its through 2011, it is obvious that a perceptible
current bull channel (channel support is 1.2525, resistance is 1.3147—see graphic). To solidify the momentum shift is also benefitting EUR. S.T.
sustainability of the current break higher, we would look for support to now hold at the 1.30 level. • Euro-
zone data today has been quite positive, as Germany saw July unemployment fell by the expected GBPUSD (1.5634) • GBP is underperforming,
20K, helping the unemployment rate tick down 0.1 percentage points to 7.6%. EUR was also given some though still up 0.3% against the USD as cable
support by the highest read on July Economic confidence in the Eurozone in over two years, recap- remains on a strong bullish trajectory, now
turing the uptrend in confidence that had been looking more neutral over the previous two months as the trading in a range around 100 points above its
economic impact of sovereign risk was feared to be growing. The positive economic data has helped to keep 200-da moving average at 1.5547 for the first
German government short yields edging higher, continuing to widen the spread over US yields. The yield dif- time since early 2010. Weaker housing price
ferential remains a very strong correlative factor with EURUSD (see graphic), with rolling 1-month correla- and consumer credit data in the UK has not
tion between the 2-year spread and EURUSD currently very stable and strong at 0.91, speaking been enough to derail GBP’s strong push as
to the rapid shift in the market’s perception of Eurozone growth momentum vis-à-vis US growth momentum. growth and inflation data continue to stoke
This has helped support the continued trimming of speculative EURUSD shorts as the positive technical trend the currency’s fire. Sharp uptrend support will
look to push a close above 1.56 today for
GBPUSD, however the six day uptrend
Key Pricing & Levels looks to be unsustainably steep as the
30 Day 1 Day 1 Week 100 Day 200 Day Pivot 1st Pivot 1st pair approaches the constraining up-
Spot
Hist Vol Change Change MA MA Support Resistance trend resistance at the 1.57 level. S.T.
USDCAD 12.5 1.0313 -0.0075 -0.0058 1.0305 1.0414 1.0277 1.0370
EURUSD 11.6 1.3087 0.0092 0.0194 1.2855 1.3595 1.3005 1.3130 Asia / Oceania
GBPUSD 10.5 1.5634 0.0035 0.0375 1.5019 1.5547 1.5565 1.5683 USDJPY (86.85) • USDJPY has traded lower on
USDCHF 11.0 1.0434 -0.0133 0.0005 1.0905 1.0647 1.0367 1.0563 the back of weak US economic fundamentals,
USDJPY 9.5 86.85 -0.62 -0.10 91.03 90.60 86.35 87.73 dropping through the 87 level to erase the
AUDUSD 16.8 0.9036 0.0104 0.0102 0.8863 0.8961 0.8947 0.9084 slight bid tone in the pair’s one-week price
USDMXN 10.8 12.65 - 0.07 - 0.12 12.62 12.77 12.61 12.71 action. We will get a raft of important
DXY (USD index) 8.2 81.57 - 0.61 - 1.03 83.65 80.62 81.31 82.06 Japanese economic data over the next
CRB Commodity 266.16 1.70 4.63 265.18 270.51 N/A N/A 24 hours, including CPI and industrial
Gold 1,167.05 3.45 -27.80 1,183.50 1,149.11 1,159.57 1,171.99 production, both expected to improve to the
WT Crude (Nymex) 77.31 0.32 -2.01 78.28 77.79 76.23 78.07 upside. Misses to the weak side would help to
Nat Gas (Nymex) 4.75 0.04 0.11 4.37 4.73 4.64 4.86 remind the market of the threat of additional
BoC Noon Rate 1.0357 CAD (close from Bloomberg not BoC): 1.0388 policy easing in the country, particularly con-
Pricing Source: Bloomberg 7/29/2010 sidering JPY’s persistent strength. The 88 level
in USDJPY constitutes the key topside chal-
Today's Releases & Speakers Period Cons Last Significance lenge on a closing basis for the time being. S.T.
8:30 AM CA Industrial Product Price MoM JUN 0.2% 0.3% Low
8:30 AM CA Raw Materials Price Index MoM JUN 1.0% -7.2% Low NZDUSD (0.7270) • The kiwi has seen some
8:30 AM US Initial Jobless Claims 460K 464K Medium very volatile trading following the RBNZ rate
1:20 PM US Fed's Fisher Speaks on U.S. Economy in San Antonio Medium announcement. While expectations were met
6:45 PM NZ Building Permits MoM JUN -- -9.6% Low on a 25bp rate increase, Governor Bollard
7:01 PM UK GfK Consumer Confidence Survey JUL -20 -19 Medium was much more dovish than expected,
7:15 PM JN Nomura/JMMA Manufacturing PMI JUL -- 53.9 Medium emphasizing the fragility of the global growth
7:30 PM JN Jobless Rate JUN 5.2% 5.2% High recovery and a softening of New Zealand’s
7:30 PM JN Overall Hhold Spending (YoY) JUN -0.9% -0.7% Low economic growth. Most damning for the cur-
7:30 PM JN Natl CPI Ex Food, Energy YoY JUN -1.6% -1.6% High rency is the Governor’s assessment that the
7:30 PM JN Natl CPI Ex-Fresh Food YoY JUN -1.1% -1.2% High recent strength in the NZD is inconsis-
7:50 PM JN Industrial Production (MoM) JUN P 0.2% 0.1% Medium tent with the softening in New Zealand’s
9:30 PM AU Private Sector Credit YoY% JUN 3.1% 2.7% Low outlook and a moderation in the coun-
9:35 PM CH MNI Business Condition Survey JUL -- 63.51 Medium try’s export prices. Bollard has now sug-
12:00 AM JN Vehicle Production (YoY) JUN -- 30.6% Low gested that the pace and extent of further OCR
1:00 AM JN Housing Starts (YoY) JUN 1.8% -4.6% Medium increases is likely to be more moderate than
1:00 AM JN Construction Orders (YoY) JUN -- 9.2% Low was projected in the June statement, and con-
2:00 AM GE Retail Sales (MoM) JUN -0.2% 0.4% High tingent on economic and financial market
5:00 AM EC Euro-Zone Unemployment Rate JUN 10.0% 10.0% Medium developments. The OIS market immedi-
5:00 AM EC Euro-Zone CPI Estimate (YoY) JUL 1.7% 1.4% High ately priced 40bps of tightening out of
the OCR over the next year, making obvi-
Suggested Reading ous the reason for NZD’s collapse. However,
U.S. Needs To Articulate Credible Fiscal Consolidation Plan - Moody's, Enda Curran, WSJ (July 29, 2010) USD weakness has helped NZDUSD recover,
Bernanke must end era of ultra-low rates, Raghuram Rajan, FT (July 28, 2010) now flat on the day. S.T.
Beige Book survey reports signs of slowdown, Robin Harding, FT (July 28, 2010)

2
GLOBAL FX STRATEGY Thursday, July 29, 2010

Our July Monthly FX Strategy Call is now available, please dial in at your convenience.

Dial: 416-695-5800
Passcode: 77386016#

This month's 20-minute call is hosted by Sacha Tihanyi and discusses:

1) Economic and FX forecast update - less tightening for the Fed and BoC
2) USD decline - factors driving the downturn

The presentation can be found at:

http://www.scotiafx.com/conference/index.htm

Conference call commands

Press 1 – Skip backward 5 seconds
Press 3 – Skip forward 5
Press 4 – Skip backward 5 minutes
Press 6 – Skip forward 5 minutes
Press 5 – Pause the playback

If you have any questions, please contact:

Camilla Sutton at (416)866-5470, camilla_sutton@scotiacapital.com or
Sacha Tihanyi at (416)862-3154, sacha_tihanyi@scotiacapital.com

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