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, August 3, 2010

USD UNDERMINED BY THOUGHTS OF FURTHER FED EASING

NET SHORT USD POSITION HITS 8-MONTH HIGH
• Attention is turning towards next week’s FOMC, ahead of Friday’s employment data.
• RBA keeps rates on hold for third consecutive month.
• USDCAD resolving to the downside.
• GBPUSD surging higher towards 1.60 into overbought territory.

FX Market Update - There seems to be no respite for the USD today, following yester-
day’s rather sharp selling as the global risk trade was in full effect. US and European
equities posted very strong gains, helping the MSCI World Index gain 2.4%, while crude
oil broke out to a new three month high above $81. This pushed most majors to gain
1% or more against the greenback, while CHF and JPY lagged. While global risk thirst is
much more subdued today, the USD still remains back-footed against most majors,
particularly JPY, EUR and GBP. Only AUD is a noticeably down against the USD follow-
ing some weaker than expected economic data, while CAD is also a laggard today. S.T.

Eyes Shifting To Next Week’s FOMC - Given the proximity of important economic
data (the ISM’s and employment) along with Fed Chief Bernanke’s recent public speak-
ing engagements, the media is now shifting its focus to next week’s FOMC meeting.
There is a piece in the Wall Street Journal today (see suggested readings) that frames USDCAD RESOLVING TO THE DOWNSIDE
the decision that the Fed faces regarding monetary stimulus; whether to use the funds
from maturing mortgage bond holdings to maintain the size of its balance sheet (by
repurchasing bonds) or to allow its balance sheet to shrink by doing nothing. Given the
signals of weakening in the economic data (not least of all inflation), and Mr. Ber-
nanke’s recent focus on addressing what the Fed can do to further support growth
should it be required, the balance of the risks suggests that policymakers would be none
too willing to let stimulus fade at this point in time. Yesterday’s manufacturing ISM,
while still sitting comfortably in expansionary territory, also provided some underlying
indications that there is a significant deterioration in forward looking measures of
growth momentum. This suggests that policy stimulus rather than unwinding is the
likelier outcome. This doesn't bode well for the USD, as the 2-yr Treasury yield grinds to
new record lows, and the popularity of the USD-funded carry trade threatens to re-
emerge. S.T.

Speculative Positioning Confirms US Fundamentals - The most recent CFTC data

on FX positioning continues to confirm the USD bearishness suggested by US Fed speak-
ers and the wobbling economic data. The net short USD position has now reached its
highest level since early December of 2009 (see graphic). It isn’t just less bearishness
over EUR and GBP that is driving the move, but also greater bullishness over the global- REBOUND MOMENTUM SHIFT RAISES THOUGHTS OF FED EASING
growth linked commodity currencies as AUD, NZD and CAD longs reenter the market.
The latter factor seems a little bit inconsistent with the trend in growth momentum, as
even China seems to be slowing, but tighter monetary conditions in these economies is
enough to add to the enthusiasm, particularly from a carry point of view. S.T.

Americas
USDCAD (1.0249) • CAD is a laggard today, down 0.2% against the USD, despite oil’s
stability near a new three month high. However, USDCAD seems to have resolved the
symmetric triangle pattern that had been developing since May, breaking uptrend sup-
port and moving lower (see graphic). This suggests that just below 1.03 we should find
resistance while USDCAD takes aim at 1.02 to the downside. There is a caveat however;
fundamental factors such as crude may be supportive, but any US growth slowdown will
impact Canada and the market is pricing that into Canada’s monetary policy profile as
rate spreads have failed to follow USDCAD lower in the recent move. This should pro-
vide downside hesitancy, and a potential cap to the near term downside in USDCAD
above parity. Today we expect USDCAD’s trading range to hold within 1.0203 and
1.0300. S.T.
GLOBAL FX STRATEGY Tuesday, August 03, 2010

Europe strong pace recovery in US manufacturing.

EURUSD (1.3237) • EUR is outperforming, up 0.4% against the USD as EURUSD has nearly reached a new Ahead of this Thursday’s Bank of England
three month high, pushing through the1.3250 level. Past this price point, the 1.3325 constitutes uptrend policy meeting, former Deputy Governor John
resistance for EURUSD’s bull channel. Speculative short futures positioning continue to show an easing in Gieve weighed in with his view on policy. Mr.
EUR-negative sentiment, and while short covering is still the prime speculative driver, the long side of the EUR Gieve expects the BoE to do nothing through
market seems to have gotten its legs under it over the past month. Ahead of this week’s ECB policy an- the autumn of this year, but expects that when
nouncement, we’ve had a look at June producer prices in the Eurozone, up 0.3% m/m and 3% y/y, just rate increases do arrive, they will be at a faster
slightly missing expectations. While CPI and PPI have rebounded (with the latter’s rebound stalling out slightly pace than what has been currently expected.
recently), inflationary impulses have hardly been threatening, and the ECB’s policy is on hold for the duration Gieve believes that should solid growth emerge
of the next year according to our Economics team. We only look for a 25bp increase in rates in the 4th quarter on a quarterly basis through the end of the
of 2011. S.T. year, rates will be boosted to the 2.5% to 3%
level rather quickly. Regardless, sterling re-
GBPUSD (1.5939) • Sterling is a mid performer, up 0.4% against the USD, buoyed by the USD selling trend mains on a stunning uptrend, breaking 2.5-
still very evident today. GBP had been wobbled temporarily however as the UK’s construction PMI came in far month uptrend resistance on Monday and
below expectations (though still expansionary) at 54.1 versus the expected 58. This followed on the heels of reaching toward the 1.60 level. The pace of
yesterday’s better than expected, though slightly weaker, manufacturing sector PMI which is still indicating a increase is somewhat worrying as GBPUSD’s
RSI is now indicating that the pair is over-
bought. Look for 1.60 to hold as near term
Key Pricing & Levels
resistance. S.T.
30 Day 1 Day 1 Week 100 Day 200 Day Pivot 1st Pivot 1st
Spot
Hist Vol Change Change MA MA Support Resistance
Asia / Oceania
USDCAD 12.2 1.0250 0.0021 -0.0104 1.0308 1.0409 1.0203 1.0300
USDJPY (85.77) • USDJPY has pushed to a
EURUSD 11.5 1.3235 0.0056 0.0238 1.2837 1.3569 1.3103 1.3315 new eight month low today, brining increased
GBPUSD 10.6 1.5937 0.0050 0.0344 1.5039 1.5539 1.5766 1.6039 commentary from Japanese policymakers as
USDCHF 11.1 1.0364 -0.0026 -0.0242 1.0899 1.0650 1.0316 1.0444 the Bank of Japan’s Board member Ryuzo
USDJPY 9.4 85.77 -0.73 -2.13 90.91 90.51 85.37 86.53 Miyao said that he is watching JPY moves
AUDUSD 16.7 0.9111 -0.0026 0.0087 0.8861 0.8959 0.9047 0.9160 carefully and that sustained yen gains may
USDMXN 10.8 12.59 0.01 - 0.09 12.62 12.76 12.53 12.66 affect the Bank’s economic forecasts. Finance
DXY (USD index) 8.1 80.55 - 0.39 - 1.64 83.68 80.71 80.16 81.25 Minister Noda also weighed in on the negative
CRB Commodity 276.85 2.50 10.19 265.18 270.40 N/A N/A impact of a stronger yen (eroding corporate
Gold 1,187.85 5.00 26.20 1,185.65 1,151.21 1,178.07 1,194.07 profits), though without any strong indication
WT Crude (Nymex) 81.65 0.31 4.17 78.26 77.87 79.62 82.89 that he is reaching the end of his rope on JPY.
Nat Gas (Nymex) 4.74 0.04 0.07 4.37 4.74 4.61 4.94 In fact, his comment that the market deter-
BoC Noon Rate 1.0290 CAD (close from Bloomberg not BoC): 1.0229 mines USDJPY helped to send the pair lower
Pricing Source: Bloomberg 8/3/2010 (his later comments were less USDJPY bearish,
but too little too late). A sustained break of
Today's Releases & Speakers Period Cons Last Significance the 86 level towards the November 2009 low
8:30 AM US Personal Income JUN 0.2% 0.4% Medium may be enough to bring greater threats. S.T.
8:30 AM US Personal Spending JUN 0.1% 0.2% Medium
8:30 AM US PCE Deflator (YoY) JUN 1.3% 1.9% High AUDUSD (0.9111) • The RBA confirmed widely
8:30 AM US PCE Core (YoY) JUN 1.3% 1.3% High expected market expectations for no change in
10:00 AM US Factory Orders JUN -0.5% -1.4% Medium policy, electing to keep the cash target rate at
10:00 AM US Pending Home Sales MoM JUN 4.0% -30.0% Medium 4.5% for the third consecutive month. The
1:00 PM MX IMEF Manufacturing Index JUL 53.1 53.6 Medium RBA remains in a wait-and-see mode as the
1:00 PM MX IMEF Non Manufacturing Index JUL 53.1 53.3 Medium policy statement characterized growth as likely
5:00 PM US Total Vehicle Sales JUL 11.60M 11.08M Medium to be close to trend and inflation close to tar-
7:01 PM UK BRC July Shop Price Index Medium get in the context of a somewhat uncertain
global economic outlook. Some weaker than
7:30 PM AU AiG Performance of Service Index JUL -- 48.8 Low
expected June retail sales temporarily hurt
9:30 PM AU Trade Balance JUN 1800M 1645M Medium
AUDUSD, as sales came in at 0.2%m/m versus
9:30 PM AU House Price Index QoQ 2Q 2.0% 4.8% Medium the 0.4% expected. Still, AUDUSD remains
10:30 PM CH China HSBC Services PMI JUL -- 55.6 High well supported with uptrend support holding
3:50 AM FR PMI Services JUL F 61.3 61.3 Low around 0.9020 today. S.T.
3:55 AM GE PMI Services JUL F 57.3 57.3 Low
4:00 AM EC PMI Composite JUL F 56.7 56.7 Low Commodities
4:30 AM UK PMI Services JUL 54.5 54.4 High Oil ($81.67) • Crude oil broke out yesterday,
5:00 AM EC Euro-Zone Retail Sales (MoM) JUN 0.0% 0.2% High almost hitting a new three month high, and
reaching over $82 today. Look for the $80
Suggested Reading level to hold as support. This would be con-
Fed Mulls Symbolic Shift, Jon Hilsenrath, WSJ (August 2, 2010) structive for indications that crude is returning
Bernanke cautions on US recovery, FT (August 2, 2010) to the higher average trading range than has
Weber is a bad choice to be EU’s top banker, David Marsh, FT (August 2, 2010) persisted in the May through July period. S.T.

2
GLOBAL FX STRATEGY Tuesday, August 03, 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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