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Daily Foreign Exchange Update Camilla Sutton, CFA, CMT

(416) 866-5470
Sacha Tihanyi
(416) 862-3154
Monday, July 26, 2010


• Stress tests show a surprisingly small 7 out of 91 banks needing capital.
• All eyes on US home sales, 3.7%m/m expected for June following -32.7% previously.
• US Q2 GDP advanced GDP estimate on Friday the biggest data event for the week.
• Net short speculative USD position hits highest level since December 2009.

FX Market Update - There seems to be a balanced risk environment in effect today

as we head into the North American morning. Asian equity markets ended up moder-
ately, while European bourses are vacillating between gains and losses, along with US
equity futures. This equity indifference had resulted in weaker oil and trendless copper,
while gold has been pushed to an intraday low. US Treasury yields have ticked down
modestly, with no real directional driver thus far today. There is a softer tone in the
USD, evident as Asian trading evolved, with the USD (DXY) index trading down
towards support at the 82 level (see graphic). The FX market is being led by
GBP, NZD and JPY, while CHF is also gaining solidly against the greenback. EUR was
trading near flat after having lost some ground in European hours, but is picking up
somewhat as we go to print, while SEK and NOK are the weakest majors. S.T.

Market Not Enthused Over Stress Tests - The European stress tests came and USD SPECULATIVE SHORTS PICK UP
went on Friday, leaving some mixed feeling towards the results, with only 7 of 91
banks found to be in need of capital (of €3.5bn). These were surprisingly posi-
tive results and thus not likely to be entirely satisfactory. One columnist in the FT im-
plied that if one were to apply the same method to testing toy-safety, one
would end up in jail (see suggested readings). The market seems to be shrugging its
collective shoulders in a cynical “we didn’t think we’d really learn anything anyway”
sort of way. If the price action today for EUR is any indication, the results will ultimately
be fully absorbed as a non-event, though the bias of the risks are tilted to the downside
as any such unexpectedly “positive” result that doesn’t engender an enthusiastic mar-
ket reaction suggests all questions were not answered and that concerns remain. S.T.

Q2 GDP Crucial for the USD - With the weaker than expected higher frequency US
economic indicators weighing heavily on the USD over the past two months, we will
get to see exactly what the impact has been on the growth rebound’s momentum with
the release of the advanced Q2 US GDP estimate on Friday. While the greatest
part of the cyclical rebound may be behind us, the worry is that the US economy will be
structurally unable to return to the level of trend growth that existed before the crisis
due to a higher natural level of unemployment and excess supply conditions in various
areas of the economy (housing for instance). The risk is that this leads to higher debt/ JAPANESE EXPORTS DECELERATING SHARPLY
GDP (all else equal) with less denominator growth in the ratio a key USD concern.
Weak Q2 GDP could be the catalyst needed to push the USD index back below 82. S.T.

USDCAD (1.0345) • CAD is underperforming today, though up 0.1% against the USD,
following weakness in oil that sent crude to an intraday low in European hours.
USDCAD remains in a constrained range between 1.03 and 1.06, with six-week down-
ward sloping resistance coming in just below the latter level and contrasting with eight-
week uptrend support which holds at 1.0263 today. Given USDCAD’s propensity to
trade to the weak side off less than stellar US economic data, despite solid employment
results and a widening policy rate differential, the risk is that the longer term
trend wins out on this developing symmetrical triangle pattern. Though this battle
could theoretically play out for another six weeks (until September 8th) should
USDCAD’s trading range continue to collapse and follow the triangle to completion
before breaking out, we suspect that data will provide a catalyst before then. Q2 US
GDP and May monthly GDP for Canada on Friday will be two such important data
events. We expect USDCAD to trade within a 1.0312 and 1.0408 range today. S.T.
GLOBAL FX STRATEGY Monday, July 26, 2010

EURUSD (1.2932) • EURUSD is a mid performer today, up 0.2% as the USD weakens heading into North GBPUSD (1.5499) • Sterling is outperforming
American trading, though the pair is trading in a trendless range thus far. There was some interesting price today, up 0.5% against the USD as cable has
action for the single currency on Friday following the stress tests. The result’s announcement seemed to gen- traded above resistance at the 1.55 level
erate a very brief EURUSD spike on short covering, followed by a slow grind lower in the pair into negative for the first time since late April, still
territory on the day. However, an afternoon spurt in US equities was enough to give EURUSD a bid, sending benefitting from a sentiment boost following
the pair up to close Friday with a modest 0.1% gain, an average performance relative to the other majors. last week’s stunning Q2 GDP results. This has
Given that the aftermath of the tests brought EUR specific-selling, and that the mild afternoon EURUSD recov- helped push EURGBP down to support at just
ery came in concert with a US equity rally, we can only assume that the market reaction to the stress above the 0.8315 level, with momentum in the
tests was one of negatively-biased indifference. This seems even more apparent considering no real short term favouring further downside past this
EURUSD follow through thus far today, even when the USD is nowhere near being considered a strong cur- key level. This week will be a quieter one for
rency. • The balance of the tests showed the greatest weakness in the Spanish cajas (where 5 of UK economic data, with housing starts and
the 7 fails were located), with one Greek bank (ATEbank, part government owned) and one German money supply data for June coming out,
bank (Hypo Real Estate, fully nationalized) also failing. Sovereign debt yields of Spain, Ireland and Greece though consumer confidence is most
(10-year bonds) seem to be flat to a touch higher, while Spanish yields are a touch lower today. The fact that likely to be the key data release for the
German yields seem to be moving higher most rapidly suggests some relief in the European bond market as week (on Thursday). S.T.
German bunds receive less of a safe haven bid. • EURUSD continues to hover close to the bottom end of a 3-
week uptrend, with support hanging close to the 1.2810 level presently. However, the uptrend is coming Asia / Oceania
under pressure as EURUSD remains unable to maintain rallies over the 1.30 level. CFTC positioning data USDJPY (87.06) • The yen is a top performing
also shows that this move continues to be supported predominantly by speculative short cov- currency today, up 0.4% against the USD. This
ering, as EURUSD shorts have fallen by 2.3 times the amount that longs have increased over the past four hides the fact that the pair briefly broke top-
weeks, a less than bullish speculative shift. S.T. side resistance at 87.60 in Asian trading before
trending lower as Europe came on-line. Japan’s
Key Pricing & Levels June trade balance showed a faster than ex-
30 Day 1 Day 1 Week 100 Day 200 Day Pivot 1st Pivot 1st pected increase in both imports and exports,
Hist Vol Change Change MA MA Support Resistance though the June export increase was the low-
USDCAD 12.4 1.0345 -0.0013 -0.0193 1.0302 1.0416 1.0312 1.0408 est rate of growth thus far in 2010 (see
EURUSD 11.6 1.2932 0.0023 -0.0035 1.2873 1.3624 1.2829 1.3001 graphic) due to a large drop in exports
GBPUSD 10.7 1.5499 0.0074 0.0269 1.5001 1.5561 1.5333 1.5583 to China and Europe. Asia ex-China and US
USDCHF 10.6 1.0504 -0.0039 -0.0027 1.0911 1.0640 1.0420 1.0576 exports remained fairly robust. USDJPY remains
USDJPY 8.4 87.06 -0.40 0.50 91.12 90.65 86.60 87.65 well entrenched on its almost 11-week down-
AUDUSD 16.1 0.8963 0.0007 0.0296 0.8867 0.8965 0.8910 0.9003 trend (topside holding at 89.50), with a tighter
USDMXN 10.6 12.72 - 0.01 - 0.19 12.61 12.77 12.68 12.78 7-week downtrend resistance level holding
DXY (USD index) 8.0 82.37 - 0.10 - 0.02 83.60 80.53 82.04 82.86 closer in to current trading levels at 88.30.
CRB Commodity 266.62 -0.24 4.40 265.49 270.62 N/A N/A
Gold 1,188.90 -0.30 6.10 1,182.03 1,147.55 1,180.66 1,200.63 AUDUSD (89.67) • AUDUSD is up a rather
WT Crude (Nymex) 78.30 -0.68 2.02 78.40 77.71 77.93 79.13 restrained 0.1% as the pair has broken its
Nat Gas (Nymex) 4.56 -0.02 0.05 4.36 4.73 4.50 4.64 200-day moving average at 0.8965 and now
BoC Noon Rate 1.0373 CAD (close from Bloomberg not BoC): 1.0358 contending with the key psychological 0.90
Pricing Source: Bloomberg 7/26/2010 level. Australian Q2 producer prices came
in lower than expected at 0.3% Q/Q,
Today's Releases & Speakers Period Cons Last Significance down from the previous 1% and less than the
8:30 AM US Chicago Fed Nat Activity Index JUN -- 21.0% Medium 0.8% expected, essentially due to lower car
10:00 AM US New Home Sales JUN 311K 300K Medium production costs. This eases pressure on
10:00 AM US New Home Sales MoM JUN 3.7% -32.7% Medium the RBA somewhat, though the CPI read
10:30 AM US Dallas Fed Manf. Activity JUL -2.5% -4.0% Medium on Wednesday will be more important
12:00 PM US Treasury's Brainard Delivers Address in Washington Low and a key contributing factor as to
7:50 PM JN Corp Service Price Index (YoY) JUN -0.9% -0.8% Low whether AUDUSD can sustain any poten-
8:00 PM AU Conference Board Leading Index MAY -- -- Medium tial move above 0.90. S.T.
2:00 AM GE GfK Consumer Confidence Survey AUG 3.5 3.5 Medium
2:00 AM GE Import Price Index (MoM) JUN 0.6% 0.6% Medium
2:00 AM GE Import Price Index (YoY) JUN 8.6% 8.5% Medium
4:00 AM EC Euro-Zone M3 s.a. (YoY) JUN -0.1% -0.2% Low
4:00 AM EC Euro-Zone M3 s.a. 3 mth ave. JUN -0.2% -0.2% Low
6:00 AM UK CBI Reported Sales JUL 3 -5 Medium

Suggested Reading
A test cynically calibrated to fix the result, Wolfgang Munchau, FT (July 25, 2010)
Uncle Sam has worse woes than Greece, Laurence Kotlikoff, FT (July 25, 2010)
Next Test for Europe’s Banks: Finding Funds, David Enrich, Stephen Fidler, WSJ (June 26, 2010)
Geithner: U.S. Should Retain a Mortgage Backstop, Nick Timiraos, Damian Paletta, WSJ (June 25, 2010)
Deflation Defies Expectations—and Solutions, Jon Hilsenrath, WSJ (June 26, 2010)

GLOBAL FX STRATEGY Monday, July 26, 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:

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, or
Sacha Tihanyi at (416)862-3154,

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