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
Tuesday, July 27, 2010

RISK SENTIMENT HELPS USDCAD TEST DOWNSIDE SUPPORT

USDCAD PUSHING THROUGH KEY SUPPORT AT 1.0280
• Commodity currencies lead as equity market developments boost sentiment.
• GBP recovering on very constructive CBI retail trade data.
• IMF officials conclude that the Chinese yuan is “substantially undervalued”.

FX Market Update - Global equity markets have begun the week well which is helping
to ensure that any tones of pessimism remain restrained. The Dow Jones Industrial
Average has moved back into positive territory on a year-to-date return 100‐day m.a. 
basis, helped yesterday by better than expected US new homes sales data and positive
guidance from FedEx. European equities today are up on UBS and Deutsche Bank beat-
ing earnings estimates, helping keep a bid tone in EUR and urging US equity futures to a
positive open on the day. The FX market is not punishing the USD, interestingly enough,
despite the lack of financial market tension today. Nevertheless, the commodity curren-
cies are doing best with NZD, AUD and CAD leading with solid gains against the green-
back on the day, while CHF and JPY have been pressured moving into North American
trading. S.T.

Housing Manufacturing and Consumer Confidence - The key USD data today will
be S&P house prices followed by consumer confidence and the Richmond Fed manufac- CONSUMER CONFIDENCE LAGGING PICKUP IN HOUSE PRICES
turing index. The S&P data has not shown a meaningful fall in the rate of home price
recovery since hitting a low January of 2009, and is expected to gain again, an impor-
tant sentiment builder given recent weaknesses in housing data. It is perhaps consumer
confidence and the Richmond Fed that may hold greater sway over the USD however, as
we have recently seen a large negative deviation from expectations in confidence data,
and a manufacturing sector deceleration that has the USD back-footed. S.T.

Euro vs. Dollar - It seems that the often predictable and relied upon negative correla-
tion between the USD and global equities is reestablishing itself at a vigorous pace. The
rolling 1-month correlation between the MSCI World index and the trade weighted USD
has spiked back to -0.9, essentially thanks to the July equity rebound as the correlation
had been weakened by the fact that the USD was beginning to march lower in June, but
with equities unable to sustain gains. With the MSCI hitting and closing at a new two
month high yesterday, the correlation has reasserted itself. Does this mean the USD
risk trade is back on? Interestingly, it actually may never have left. If we con-
sider the EURUSD / global equity correlation, it has essentially matched the same corre-
lation pattern as the broad USD trade weighted index, whereas the equity-currency pair
correlations with USDCAD and AUDUSD have remained rather strong and stable. This
suggests that the risk trade has really not been as suppressed as one would have EUROZONE M3 FINALLY SHOWING SIGNS OF LIFE
thought if only looking at the USD’s performance vis-à-vis global equities on a trade
weighted basis. Rather, it is alive and well with AUDUSD’s consistently stable and strong
correlation with global equities actually eclipsing even AUDJPY’s consistently strong
correlation with global equities. It seems much more likely the case that the EU-
RUSD pair, along with the USD on a broad trade weighted basis, is not being
driven by the risk trade but rather by the fundamental outlook, which seems
to be deteriorating in the US, while the state of affairs in the Eurozone seems to be look-
ing up relative to very depressed expectations that had persisted for much of 2010. S.T.

Americas
USDCAD (1.0265) • CAD is outperforming today, up 0.5% against the USD. USDCAD
had been finding difficulty in sustainably breaching strong support at the 100-day mov-
ing average (1.0302) though we have currently broken key downside support at
1.0280. With no CAD-specific data today, look for equity market direction off of US
data to decide the pair’s direction, with six-session downtrend resistance at 1.0380
suggesting an initial topside cap to USDCAD resulting from any negative senti-
ment reaction. We expect USDCAD to trade between 1.0224 and 1.0336 today. S.T.
GLOBAL FX STRATEGY Tuesday, July 27, 2010

Europe than 3 years for July. The volume of orders

EURUSD (1.3032) • EURUSD continues to show short term upside vigour, though a close above the crucial placed and volume of expected sales also sky-
1.30 level has remained a challenge, despite closing yesterday within a hair of that price point. Monetary rocketed, indicating solid forward looking
conditions in the Eurozone seem to be perking up as it appears that M3 money growth in the Eurozone has momentum. EURGBP has risen off of its sup-
stabilized from further downside. The y/y M3 aggregate expanded by 0.2%, the first non-negative port level at the 0.8315 level, with five-session
rate of change in eight months, and is beginning to show some upside movement. This is important downtrend resistance at 0.8400 being briefly
from the ECB’s point of view as it signals that economic developments are helping to prevent deflationary violated today. This takes some downwards
pressures via the monetary channel. This also eases the risk that the central bank’s sterilized bond buying momentum out of the pair for the time being
moves to unsterilized, though this was always a lower probability event as the ECB seems like it was more as the short term downside tendency stabilizes.
concerned with placing a ceiling on the borrowing costs of vulnerable countries. • The four session move in S.T.
EURUSD has been bullish, with higher intraday highs and lows achieved over each session (if today’s price
action holds). This seems to suggest an imminent close above 1.30 in the pair, with support for Asia / Oceania
this up-move coming in at 1.2910, ahead of secondary longer term 1-month trend support at AUDUSD (0.9067) • AUDUSD has breached
1.2840. S.T. the 90 level with authority and is trading at a
2.5 month high as AUD outperforms today, up
GBPUSD (1.5540) • Sterling was under significant pressure in European trading and a definite underper- 0.4% against the USD. The pair’s MACD is
former. Cable is now trading up 0.3% thanks to a much better than expected CBI distributive trades showing that strong upside momentum is in
result, with the data showing that the volume of retail sales rose at the fastest pace in more place, helping set the technical tone for further
gains. The release of Australia’s 2Q CPI
data over the next 24 hours will provide
Key Pricing & Levels the fundamental backdrop to further
30 Day 1 Day 1 Week 100 Day 200 Day Pivot 1st Pivot 1st near term direction as the market looks
Spot
Hist Vol Change Change MA MA Support Resistance for a 1% rate of increase in prices. How-
USDCAD 12.5 1.0265 -0.0058 -0.0170 1.0302 1.0415 1.0224 1.0346 ever, the OIS curve is currently pricing in only
EURUSD 11.6 1.3032 0.0038 0.0150 1.2868 1.3615 1.2914 1.3094 another 25bps of tightening over the next 12
GBPUSD 10.5 1.5540 0.0050 0.0276 1.5007 1.5556 1.5444 1.5591 months, and only about a 1 in 4 chance that
USDCHF 11.3 1.0584 0.0098 0.0056 1.0909 1.0642 1.0495 1.0638 the RBA tightens at its next meeting on August
USDJPY 8.8 87.38 0.50 -0.13 91.09 90.64 86.88 87.84 3rd. S.T.
AUDUSD 16.2 0.9067 0.0042 0.0227 0.8867 0.8964 0.8975 0.9114
USDMXN 10.8 12.64 - 0.04 - 0.14 12.61 12.77 12.60 12.71 USDCNY (6.7784) • The People’s Bank of
DXY (USD index) 8.0 81.93 - 0.11 - 0.82 83.61 80.56 81.68 82.41 China released its 2nd quarter economic up-
CRB Commodity 266.66 0.04 5.46 265.39 270.60 N/A N/A date. The PBoC is cautiously optimistic about
Gold 1,184.50 0.95 -7.55 1,182.60 1,148.17 1,177.66 1,193.18
China’s economy, seeing a low probability that
the Eurozone crisis negatively impacts China’s
WT Crude (Nymex) 79.26 0.28 1.81 78.39 77.75 78.42 79.73
economy (low double dip recession probability
Nat Gas (Nymex) 4.64 0.03 0.05 4.36 4.73 4.55 4.69
for China). The PBoC’s deputy governor Hu
BoC Noon Rate 1.0312 CAD (close from Bloomberg not BoC): 1.0323
Xiaolian continues to sell the positive aspects
Pricing Source: Bloomberg 7/27/2010
of yuan flexibility with recent statements,
Today's Releases & Speakers Period Cons Last Significance seemingly in reaction to rising international
pressure. On that front, the IMF is reported
9:00 AM US S&P/CaseShiller Home Price Ind MAY -- 144.56 Medium
to have found that the yuan is substan-
9:00 AM US S&P/CS 20 City MoM% SA MAY 0.2% 0.4% Medium
tially undervalued (no surprise there), dur-
9:00 AM US S&P/CS Composite-20 YoY MAY 3.9% 3.8% Medium ing its annual review of the Chinese economy.
10:00 AM US Richmond Fed Manufact. Index JUL 11 23 Medium though nothing official has been released as of
10:00 AM US Consumer Confidence JUL 51 52.9 High yet. • Domestic Chinese rating agency Dagong
9:30 PM AU Consumer Prices (QoQ) 2Q 1.0% 0.9% High has criticized the practice of Chinese local-
9:30 PM AU Consumer Prices (YoY) 2Q 3.4% 2.9% High government backed borrowers of shopping
10:00 PM JN Bank of Japan Board Member Kamezaki to Speak in Sapporo City Low around for ratings, saying that current
11:00 PM NZ NBNZ Business Confidence JUL -- 40.2 Medium credit risk assessments are too optimis-
11:00 PM NZ NBNZ Activity Outlook JUL -- 38.5 Medium tic, creating a dangerous situation. This plays
against news that Chinese banks are facing
1:00 AM JN Small Business Confidence JUL -- 47.4 Medium
serious default risks on more than 20%
4:00 AM EC ECB Publishes Bank Lending Survey Medium
of loans to local governments across the
4:45 AM UK BOE's King, Bean, Fisher, Miles, Sentance Testify High country, according to the results of a self-
5:00 AM GE IFO July Business Climate Survey by Industry (Table) Low assessment directed by China’s banking regu-
lator. • USDCNY continues to trade within the
Suggested Reading mid-to upper end of its approximate 6.7700 to
IMF Sees Yuan as Undervalued, Bob Davis, Aaron Back, WSJ (July 27, 2010) 6.7850 July range, with no signals of further
Chinese banks face state loans turmoil, Jamil Anderlini, FT (July 26, 2010) significant downside flexibility currently being
Course of Economy Hinges on Fight Over Stimulus, Jon Hilsenrath, WSJ (July 26, 2010) seen in the pair. S.T.
Now let us stress-test the central banks, Terrence Keeley, FT (July 26, 2010)
Supply of Homes Set to Grow, Robbie Whelan, WSJ (July 27, 2010)

2
GLOBAL FX STRATEGY Tuesday, July 27, 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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