GLOBAL FX STRATEGY 

 

Daily Foreign Exchange Update 
Thursday, June 9, 2011  EUR TO RALLY IF TRICHET UTTERS ‘VIGILANCE’ 
• CAD is trading within narrow range ahead of Friday’s jobs data.  • Beige book saw growth slow, though economic activity still expanding.   • EUR to remain range bound as market participants await ECB conference.  • AUD weaker as jobs data suggest ongoing delay in RBA tightening.  • NZD strength seen following hawkish central bank commentary.      FX  Market  Update  ‐   Markets are mixed with commodity prices flat while  equity futures are pointing to a stronger open.  Yesterday the Fed’s Beige  Book  illustrated  a  slowing  growth  trajectory,  tempering  expectations  of  economic  activity as OPEC members failed  to reach consensus on produc‐ tion.  Today NZD is the strongest performer as a result of renewed hawkish‐ ness from the RBNZ.  Conversely, AUD has taken a hit following weaker jobs  data.    Other  majors  are  trading  within  a  narrow  range  ahead  of  the  ECB  press conference scheduled for 8:30 EST.  E.T.    Americas  USDCAD (0.9788) •  CAD is trading flat to yesterday’s close despite stronger  oil  prices  as  a  result  of  risk  aversion  that  saw  equity  markets  continue  to  fall.  The recent rally in USDCAD has slowed amid ongoing resistance seen  around 0.9800, and technicals do not suggest any near term bias.  Today’s  economic data include the April merchandise trade balance and new hous‐ ing price data, both expected to remain relatively flat MoM.   Tomorrow’s  employment data for May will be key to watch, as market participants ex‐ pect a slowdown from the previous month.  We expect today’s range to fall  between 0.9743 (100 day MA) and 0.9815.  E.T.    Europe  EURUSD  (1.4620)  •  EUR  is  entering  the  North  American  session  having  gained 0.2% against the USD. For the second session yesterday, EUR failed  to  break  above  1.4700.  Today’s  session  could  be  volatile.  Near‐term  sup‐ port lies at the 9‐day moving average of 1.4511, while resistance is initially  at 1.4700. Most technical studies are suggesting the near‐term rally has yet  to  complete;  however  today’s  comments  from  President  Trichet  are  likely  to lay the foundation for near‐term market direction. We  hold a year‐end  EUR target of 1.5000. C.S.    We  are  biased  towards  Trichet  using  the  word  “vigilance” ‐ As expected,  the ECB has left interest rates on hold at 1.25%. The market will now shift  its attention to whether or not President Trichet utters the word “vigilance”  when he speaks today at 8:30am ET. If he does it signals a July 7th interest  rate hike and will support a EUR rally; should he fail to and instead choose  to  “monitor  closely”,  it  suggests  that  the  ECB  will  delay  another  interest  rate  hike  until  the  August  4th  or  September  8th  meetings.  This  remains  a  medium  term  positive  for  EUR,  but  would  likely  cause  some  temporary  weakness today. The updated ECB projections will also be closely watched,  with many expecting a bump up to the overall inflation profile ‐ providing at  least some support for the use of the world “vigilance”, even as problems in  Greece are ongoing. C.S.   

Camilla Sutton, CFA, CMT         Eric Theoret  Chief Currency Strategist          Currency Strategist  (416) 866‐5470           (416)863‐7030 

      

Camilla_Sutton@scotiacapital.com          Eric_Theoret@scotiacapital.com        

APR CDN MERCHANDISE TRADE TO REMAIN FLAT  

US TRADE BALANCE EXPECTED TO WIDEN IN APRIL 

ECB LEAVES RATES UNCHANGED, ‘VIGILANCE’ LIKELY 

We have launched a daily Emerging Asian FX strategy publication.  If you are interested in being added to this distribution list, please e‐mail Sacha_tihanyi@scotiacapital.com 

GLOBAL FX STRATEGY  

 

                           Thursday, June 09, 2011 
  AUDUSD  (1.0582)  •  AUD  is  weak  having  lost 0.5% against the USD and underper‐ forming  all  the  primary  currencies.  The  release  of  May  unemployment  was  dis‐ appointing,  adding  only  +7.8k  jobs  (consensus had been for +25k), however  the  unemployment  rate  was  stable  at  4.9%.  Unfortunately  the  details  of  the  report  were  also  weak,  with  a  loss  of  ‐ 22k full time jobs and a downward revi‐ sion  to  the  already  disappointing  April  release. A second soft employment print  will  likely  play  into  a  more  dovish  RBA  and  hinder  significant  near‐term  AUD  gains.  However,  we  continue  to  expect  that  high  commodity  prices  and  strong  Asian growth will support the Australian  economy.  We  hold  a  1.09  year‐end  tar‐ get. C.S.    NZDUSD  (0.8248)  •  NZD  is  outperform‐ ing, having gained 1.1% against the USD  as  we  move  into  the  open  and  flirting  with its May highs. Yesterday, the RBNZ  left interest rates at 2.5% (as expected),  however  the  statement  was    far  more  hawkish  than  the  April  release.  Noting  for  the  first  time  since  the  earthquake  that a gradual increase in the OCR will be  required  in  the  next  two  years  to  offset  the  impact  of  inflation.  Previously  the  statement  had  simply  stated  that  the  current  level  of  the  OCR  was  appropri‐ ate. C.S.    USDCNY  (6.4759)  •  CNY  continues  to  strengthen  ahead  of  tomorrow’s  trade  data,  where  export  growth  is  expected  to  have  moderated.    Other  significant  developments  include  a  rise  in  China’s  treasury  yields,  IMF  comments,  and  ru‐ mours of continued liberalization for the  country’s  equity  markets.    The  rise  in  government  yields  suggests  an  elevated  risk  of  tighter  monetary  policy,  likely  needed  to  temper  inflation  amid  ongo‐ ing growth estimated to average 9.5% in  2011/12  (IMF).    CPI  will  be  released  on  Monday, with expectations of 5.5% YoY,  up from 5.3% the previous month.  E.T. 

Today, Germany released rising labour costs (+2.8% y/y and 2.0% q/q). Details over a  second  potential aid package for Greece continue to leak out, with Merkel and Schauble having gained  support from their coalition for a second bailout ahead of parliamentary discussions.  C.S.    GBPUSD (1.6417) • Sterling has gained 0.2% as we move into the North American open, and is  in line with EUR. The BoE left interest rates on hold at 0.5% and made no change to its asset  purchase program. As is typical when there is no change, there was no statement from the BoE,  leaving market participants waiting for the release of the minutes on June 22nd. Also today, the  UK  trade  deficit  narrowed  on  both  the  headline  (‐£7.4bn)  and  ex‐oil  (‐£6.8bn).  On  a  month‐ over‐month basis both imports and exports moderated, supporting what the market is already  well aware, the economic picture in the UK is challenged. C.S.    Asia / Oceania  USDJPY (80.10) •  JPY is weaker as we approach the North American open, down 0.2% as a re‐ sult of lower than expected Q1 GDP figures and ongoing political turmoil surrounding the fate  of Japan’s Prime Minister Kan.  Annualized Q1 GDP came in at ‐3.5% vs expectations of ‐3.0%,  with  consumption  and  investment  causing  contraction  while  trade  and  government  expendi‐ tures supported growth. JPY has strengthened continually since May 31 on rising risk aversion  amid signs of slowing US and global growth.  Yesterday USDJPY closed below 80.00 for the first  time since mid‐March, and technicals do not suggest any slowing in in the bearish trend.  We  maintain our target of 79.00 for Q211.  E.T. 
Key Pricing & Levels
USDCAD EURUSD GBPUSD USDCHF USDJPY AUDUSD USDMXN DXY (USD index) CRB Commodity Gold WT Crude (Nymex) Nat Gas (Nymex) BoC Noon Rate 30 Day  Hist Vol 7.6 13.0 7.3 12.1 7.1 11.8 9.0 9.0 Spot     0.9780     1.4605     1.6418     0.8398       80.06     1.0595       11.83       73.88     348.34 1,536.02       101.28           4.85     0.9780 largest 1 Day %  1 Week  100 Day  200 Day  Pivot 1st  Chg % Chg MA MA Support      0.13 ‐     0.21     0.9743      0.9940      0.9739      0.15      0.79     1.4124      1.3781      1.4548      0.09      0.29     1.6243      1.5994      1.6355 ‐     0.45      0.32     0.9065      0.9418      0.8359 ‐     0.21      1.05         82.00          82.47          79.74 ‐     0.27 ‐     0.71     1.0362      1.0084      1.0530      0.11 ‐     1.69         11.86          12.14          11.77 ‐     0.01 ‐     0.62         75.91          77.60          73.62      0.58      0.70     349.37      325.47 N/A ‐     0.11      0.16  1,448.15   1,400.02   1,529.17      0.51      0.85         99.93          91.52          98.90        ‐      1.11          4.25           4.13           4.60 CAD (close from Bloomberg not BoC): loss gain Pivot 1st  Resistance          0.9821          1.4678          1.6474          0.8425           80.34          1.0693           11.87           74.05 N/A     1,544.95 102.77                      5.01          0.9793
6/9/2011

Pricing Source: Bloomberg

Today's Releases & Speakers Time  Country Release Period Cons  Last  Significance (EST) 08:30 EC Trichet Speaks at ECB Monthly News Conference High 08:30 US Initial Jobless Claims 419K 422K Medium 08:30 US Trade Balance APR ‐$48.8B ‐$48.2B Medium 08:30 CA Int'l Merchandise Trade APR 0.6B 0.6B Medium 08:30 CA New Housing Price Index MoM APR 0.1% 0.0% Medium 10:00 US Wholesale Inventories APR 1.0% 1.1% Medium 11:30 US Fed's Yellen (voting dove) Speaks on Housing, Inequality in Cleveland; Q&A Medium 22:00 CH Trade Balance (USD) MAY $19.30B $11.42B Medium 22:00 CH Exports YoY% MAY 20.4% 29.9% Medium 22:00 CH Imports YoY% MAY 22.0% 21.8% Medium 02:00 GE Consumer Price Index (YoY) MAY F 2.3% 2.3% Medium Medium 02:50 EC ECB's Trichet Speaks in Frankfurt 04:30 UK Industrial Production (Apr), Manufacturing Production (Apr), PPI (May) Medium

Suggested Reading   U.S. Growth Could Trip on Wider Trade Gap, K. Evans, WSJ (June 9, 2011)  Beige Book Confirms Break in Supply Chain, R. Harding, FT (June 9, 2011)  Greek Ball in ECB’s Court, R. Barley, WSJ (June 9, 2011)  Lagarde ‘Confident’ About IMF Job, K. Hille, FT (June 9, 2011)  Gilts Investors Look to Return of QE in UK, D. Oakley, FT (June 9, 2011)    2

GLOBAL FX STRATEGY  

 

                           Thursday, June 09, 2011 

Our June FX strategy conference call is now available. Please feel free to access it at your convenience:    Dial: 905‐694‐9451  (local to Toronto)  Pass code: 85957275#    This month's 20‐minute call is hosted by Camilla Sutton and discusses:   • Overview of Scotia's FX Forecast   • Weak USD and an update on US and global growth   • USDCAD outlook from here    The presentation is attached but can also be found at:  http://www.scotiafx.com/conference/index.htm 

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