GLOBAL FX STRATEGY

DAILY FX UPDATE
Friday, August 21, 2015

Eric Theoret, CFA, CMT

Currency Strategist
(416) 863-7030
Eric.Theoret@scotiabank.com

EUROPE PROVIDES OFFSET TO WORRISOME CHINA PMI

USD weakening vs most G10 & flat vs. GBP, AUD, CAD & gold.
CAD unchanged, range bound in August as relative policy offsets oil.
EUR climbs to two-month high on PMIs, EM flows & relative policy.
GBP steady, reaching fresh highs despite deterioration in yield spread.
USDJPY pressured to fresh one-month low on dual PMIs & tone.
AUD is stable, recovering from China-driven decline.
USDCNY unchanged, ongoing pattern of movement hints to official
involvement, raising concerns over need for RRR cut.

FX Market Update - The most recent round of global PMIs is driving FX

and the broader tone, with a focus on Chinas concerning 47.1 contraction print (bottom chart) and the upside surprises to figures out of the
euro areaboth Germany and the euro area aggregate are hinting to an
accelerated pace of growth. JPY and EUR are outperforming the majors
and SEK is outperforming the broader G10. AUD and CAD have shown
notable resilience in the face of continued global growth concerns and
both are flat vs the USD. GBP is quiet and gold has faded its China-driven
gains in the face of stronger euro area PMIs. The ongoing pattern of
remarkable end-session rallies in CNY hints to the continued involvement of official players, raising the risk of a near term cut to reserve
requirement ratios in order to manage tightened liquidity conditions
resulting from involvement. The broader tone remains vulnerable, however we note that both U.S. equity futures and Treasury yields have recovered from their China-driven lows. There are no high-level U.S. releases scheduled through the NA session, with the flash Markit PMI unlikely to prove particularly market-moving. There are no Fed speakers.
E.T.
USDCAD (1.3092) CAD is flat, consolidating within a relatively narrow
range with notable resilience to the release of worrisome PMI figures
out of China. The broader tone remains important, however the near
term focus is likely to shift toward domestic releases with retail sales for
June and CPI for July. Headline CPI is expected to climb to a YTD high of
1.3% y/y and core is seen rising to 2.4% y/y to match its March (multiyear) high. Both domestic releases will be important for the BoC outlook, given OIS pricing of a 61% chance of a 25bpt rate cut over the next
12 months. USDCAD has been range bound in August (top chart), unable
to make fresh highs despite the continued decline in oil prices with WTI
down over 12% on a month-to-date basis. CAD drivers appear to have
shifted, with relative policy expectations taking on greater importance
(middle chart) while restraining the overall range of movement given
the simultaneous softening of expectations for both the Fed and BoC.
E.T.

USDCAD RANGE BOUND IN AUGUST

Source: Bloomberg & Scotiabank FX Strategy

USDCAD TRADING IN TANDEM WITH 2Y SPREAD

Source: Bloomberg & Scotiabank FX Strategy

CHINA MFG. FLASH PMI FALLS TO 47.1

USDCAD short-term technicals: neutralwe await a break of the August range roughly bound between 1.2950 and 1.3200. Momentum signals are conflicted and short term MAs have converged to provide support just above 1.3071. E.T.
Source: Bloomberg & Scotiabank FX Strategy

GLOBAL FX STRATEGY

Friday, August 21, 2015

EURUSD (1.1281) EUR is strong, up 0.4% and trading at its highest level since late June with movement influenced by Chinas PMI, EM flows
and the regional growth outlook following the release of flash PMIswith EUR initially pressured by broad disappointment to the figures from
France and subsequently retracing in response to unexpectedly strong readings from Germany (54.0 composite) as well as the euro area aggregate (54.1 composite). The PMI readings have helped to mitigate some of the recent concerns voiced by the ECB, specifically the impact of
slowing EM growth and its implications for euro area exports. Relative policy expectations are providing added support, given the narrowing in
both the 2Y and 10Y U.S.-Germany yield spread. Greece update: PM Tsipras has resigned, paving the way for fresh elections anticipated to
take place on September 20th. The impact on EUR has been relatively limited, with risk shifting to the fall given complications for the timing of
programme implementation and reviews by both the eurogroup and IMF. E.T.
EURUSD short-term technicals: bullishEUR is trading at two-month highs, its momentum indicators accelerating with an RSI of 65 climbing
toward overbought levels above 70. Near term support is expected at the 9 day MA (1.1135) and focus is on 1.1350 as the next key risk level to
the upside. E.T.
GBPUSD (1.5678) GBP is quiet, maintaining its modest rise with a break to fresh highs to reach its highest level since early July. The response
to domestic public finance figures was limited, and we note GBPs resilience in the face of broader turbulence. GBP is strengthening in spite of
a notable deterioration in yield spreads, leaving it vulnerable to downward movement in the event of an adjustment. However, measures of
sentiment remain stable, the steady upward trend in risk reversals hinting to an ongoing moderation in demand for downside protection in
GBP. E.T.
GBPUSD short-term technicals: neutral-bullishmomentum indicators are only modestly bullish, as GBP continues its climb to fresh 8-week
highs. Near term support continues to be observed around its short-term MAsthe 9 and 21 at 1.5638 and 1.5600, respectively. We see limited resistance ahead of 1.5750. E.T.
USDJPY (122.72) USDJPY has been pressured to a fresh one-month low, a result of the dual PMI release with Japans flash rising to 51.9its
highest level since January as Chinas disappointment weighed on the broader market tone. Risk from here remains centered on the broader
tone as NA participants adjust to greater concerns over global growth. Risk reversals have shifted violently and highlight a notable increase in
demand for protection against downside risk in USDJPY (JPY strength). E.T.

Aug 21, 2015

TECHNICALS: BUY/SELL SIGNALS AND PIVOT LEVELS

30 Day
Hist Vol
USDCAD
8.8
EURUSD
8.9
GBPUSD
5.4
USDCHF
8.5
USDJPY
5.0
AUDUSD
10.2
USDMXN
8.9
DXY (USD index)
7.1
EURCAD
9.9
GBPCAD
9.2
AUDCAD
9.8
CADMXN
10.3
BoC Noon Rate

Spot

MACD

1.3090
1.1278
1.5676
0.9540
122.71
0.7334
16.82
95.42
1.4763
2.0520
0.9600
12.85
1.3080

sell
buy
buy
sell
sell
buy
buy
sell
buy
sell
sell
buy

9 & 21day MA
buy
buy
buy
sell
sell
buy
buy
na
buy
buy
buy
buy

DMI
buy
buy
buy
sell
sell
sell
buy
sell
buy
buy
sell
buy

RSI
57
65
57
39
38
44
75
36
69
60
50
70

Pivot 1st
Support
1.3041
1.1158
1.5614
0.9489
122.07
0.7288
16.65
94.97
1.4632
2.0456
0.9544
12.70

Pivot 1st
Resist.
1.3157
1.1346
1.5731
0.9632
123.76
0.7376
16.92
96.22
1.4844
2.0601
0.9660
12.94

Source: Scotiabank & Bloomberg

GLOBAL FX STRATEGY
TODAY'S CALENDAR
Time
Country Type
(EST)
08:30
CA
DATA
08:30
CA
DATA
08:30
CA
INFL.
08:30
CA
INFL.
08:30
CA
INFL.
08:30
CA
INFL.
08:30
CA
INFL.
08:30
CA
INFL.
09:45
US
PMI
10:00
EC
DATA

Friday, August 21, 2015

Release

Period Consensus

Last

Significance

Retail Sales MoM

Retail Sales Ex Auto MoM
CPI NSA MoM
CPI YoY
CPI Core MoM
CPI Core YoY
CPI SA MoM
CPI Core SA MoM
Markit US Manufacturing PMI
Consumer Confidence

Jun
Jun
Jul
Jul
Jul
Jul
Jul
Jul
Aug P
Aug A

1.0%
0.9%
0.2%
1.0%
0.0%
2.3%
0.4%
0.3%
53.8
-7.1

HIGH
HIGH
HIGH
HIGH
HIGH
HIGH
med-high
med-high
med-high
med

0.2%
0.5%
0.1%
1.3%
0.0%
2.4%
--53.8
-6.9

CONTACTS - GLOBAL FX STRATEGY

Please contact authors directly to be added to distribution lists

Eric Theoret, CFA, CMT

FX Strategist (G10), Associate Director
T.416.863.7030
eric.theoret@scotiabank.com

Eduardo Suarez
Senior FX Strategist (LATAM), Director
T.416.945.4538
eduardo.suarez@scotiabank.com

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