Tuesday, November 6, 2012

dailymust http://www.scotiafx.com/Chart_Feed/FX1.pdfc

GLOBAL FX STRATEGY


Daily Foreign Exchange Update


Camilla Sutton, CFA, CMT Eric Theoret

Chief Currency Strategist Currency Strategist

(416) 866-5470 (416) 863-7030


Camilla.Sutton@scotiabank.com Eric.Theoret@

Tuesday, November 6, 2012 scotiabank.com

ELECTION DAY - BIAS FOR USD WEAKNESS



USD softer leading into the election; see our FX breakdown below.


CAD is strong on the back of the RBA and better risk appetite.


EUR flat; once election passes the focus will be on increasing tensions

over Greece, recessions, limited options for the ECB & EUR weakness.



GBP flat, underperforming majors on weaker industrial production.


JPY unchanged given offsetting risk of US & domestic politics.


AUD outperforms on RBA; left rates unchanged at 3.25%.


Updated FX Strategy conference call is available - please see page 3.

FX Market Update -


Leading into the NA open risk appetite has improved,

supporting equities, commodities and weighing on the USD. FX

ranges have generally been tight, with the exception of AUD that has

rallied 0.7% after the RBA decided to leave interest rates on hold (the

market had been 50/50 for a cut). CAD has followed in sympathy, up

0.3%, most other currencies are +/-0.1% from yesterday’s close, including

JPY, NOK, GBP, EUR and SEK. The focus is today’s US election C.S.


The FX reaction to the election has two complications: 1)the near and

medium term and 2)what transpires in Congress.



With the first polls

closing at 6:00pm EST, and Ohio closing at 6:30pm, there could be some

impact early in the Asian session; however the election is notably tight,

with a candidate needing 270 of 538 electoral college, leaving most of

the impact likely in the European session. For FX in the near-term the

key driver is the fiscal cliff; however in the medium term it is the ability

to craft a credible fiscal plan, the growth outlook and who is likely to

lead the Fed in January 2014.

Our take on how FX markets reacts are

highlighted below



- however we caution that regardless of the election

outcome, weights are piling up against EUR. C.S.


Obama win with Republican House, Democratic Senate



- USD negative

in short term giving back some of the recent gains; USD negative in the

medium term as the fiscal path remains uncertain, but there is minimal

impact on the Fed.


Obama win with Republican House & Senate



- USD positive in nearterm

as fiscal cliff negotiations will likely be difficult and a temporary

period of USD strength could emerge on risk aversion. USD negative in

medium-term as fiscal negotiations will be difficult and there could be

added tensions over Fed policy.


Romney win, Republican House, Democratic Senate



- USD neutral in

near-term as USD has already rallied and fiscal cliff might be negotiated;

USD positive in medium term as tensions over Fed would be significant

and fiscal plan might be negotiated.


Romney win, Republican House, Republican Senate



- USD positive in

both the near and medium term as the fiscal cliff is avoided by Bush tax

cuts being deferred, there is likely to be a credible fiscal plan put forth

and changes at helm of Fed to a less dovish governor are likely. C.S.


Americas



USDCAD (0.9940) • CAD has strengthened, gaining 0.2% into the NA

open. The rally was driven by better risk appetite and the RBA’s decision


USDCAD BUY SIGNAL FADES; FIBO HOLDS

RBA LEAVES RATES UNCHANGED AT 3.25%

CAD’S CORRELATIONS STRENGTHEN



Source: Bloomberg & Scotiabank FX Strategy

Source: Bloomberg & Scotiabank FX Strategy

Source: Bloomberg & Scotiabank FX Strategy


RBA Cash Target Rate (L)


AUDUSD (R)



S&P equities

Oil (WTI)

VIX S&P vol

MACD



50% Fibo holds as resistance


2


Global FX Research Tuesday, November 06, 2012

Suggested Reading



Austerity hits oil patch’s capital spending budgets


, D. Parkinson, G&M (November 6, 2012) - The capital spending drought in the Canadian oil

patch continues, as weak commodity prices, shrinking cash flows & an uncertain future have budgets set to tighten again in 2013.



Five things to watch on election night


, G. Seib, WSJ (November 6, 2012) - the size of the turnout, race, college towns, Virginia & Ohio.

$6bn US Poll Sparks Unease Among Voters


, G. Tett, FT (November 6, 2012) - While US election spending has risen to roughly $18 per person, it

is the creation of ‘super-pacs’ that has generated concern among the electorate.



US election is cliff-hanger for investors


, J. Lahart, WSJ (November 6, 2012) - It is unclear whether either President Obama or Mr. Romney will

be able to forge a consensus on fixing America's finances. But the road for can kicking is getting shorter.



Madrid Clings to Truce With Bond Markets


, R. Atkins, FT (November 6, 2012) - Spain is playing a game of chicken with bond markets.

Europe, Central Bank spar over Athens aid


, B. Blackstone, WSJ (November 6, 2012) - a good summary of the upcoming risk to Greece including

the funding gap and negotiations between governments, ECB and mandates.



IMF Warning Adds to French Economy Fears


, H. Carnegy, FT (November 6, 2012) - Report adds pressure on Hollande to stem industrial decline.

GBPUSD (1.5982) • Sterling is flat and

underperforming on the crosses following

the release of weaker than expected

industrial and manufacturing production

data. While markets will now look

to Thursday’s BoE for domesticallydriven

movement, we expect GBP to

trade on broader market sentiment

given the near term, two-way risk arising

from US politics.

The outlook for

BoE policy remains supportive of GBP



,

however the recent disappointment in

PMIs and now IP may add to a renewed

desire for measures to ease the burden

of ongoing structural adjustment. E.T.


Asia / Oceania



USDJPY (80.00) • JPY is unchanged from

yesterday’s close and trading within a

relatively narrow range ahead of near

term US event risk. Movement in

USDJPY remains congested around

80.20.

Public comments from officials

at the MoF and policymakers at the

BoJ are bearish JPY



, as they continue to

suggest a confidence in last week’s easing

measures and commitment toward

cooperation. Additionally, the domestic

political environment remains challenging,

given the standoff over a deficit

financing bill, as credit rating agencies

have recently expressed concern about

the impact of uncertainty. E.T.

AUDUSD (1.0440) • AUD has rallied

0.7% from yesterday’s close, to its

highest

levels since late September



, as markets

react to an unexpected hold in

policy from the RBA, where rates were

left unchanged at 3.25%. A 25bpt cut

had been expected. The policy statement

suggested that the RBA viewed a

hold in policy as the appropriate decision


given the recent improvement in

economic indicators



and the resilience

of inflation. E.T.

to leave interest rates unchanged (markets had been pricing in a 50/50 chance of a cut), which

served as a reminder that

central bank policy matters to FX markets and the BoC is far more

hawkish than the Fed



. We expect this divergence to be one of the main factors driving CAD

strength in 2013. Today’s focus is the US election, with the only domestic data the Ivey PMI

(cons. 58.2) and unlikely to sustainably move markets. Correlations between CAD and other currencies

like EUR and AUD remain low; however there has been a

noticeable increase in the correlations

between CAD and other asset classes



(see top chart), with the relationship strengthening

materially with equities, oil and the VIX (S&P vol). This suggests that for CAD it is the global

growth outlook and central banking policies that are driving it. We expect today’s range to be

relatively narrow, falling between 0.9922 and 0.9985 (Friday’s range). C.S.


Europe



EURUSD (1.2800) • EUR is flat leading into the NA session; however

once the knee-jerk election

reaction passes, we expect the tone towards EUR to turn bearish again.



The intensity over the

escalation of both political and funding problems for Greece is concerning and should limit EUR

rallies. Thursday’s ECB meeting is unlikely to prove EUR positive and the market is likely to refocus

on Europe after being sidelined by the US over the last several weeks. Today’s services PMIs

were all in contractionary territory, with the Eurozone’s at 46; German and French PMIs were

notably weak (48.4 and , respectively). Also today, Germany released weak factory orders, a notably

volatile series, however it is hard to ignore the weakness of -3.3% m/m.

We expect EUR to

trend lower into year-end, closing at 1.27



. C.S.

Technical Snapshot


(near-term 48-hour outlook)

USDCAD


- bullish, with all signals still in buy territory, however USDCAD has struggled to break

above the 50% fibo at 1.0040 and the MACD is flirting with a sell signal (see chart on page 1). C.S.


EURCAD


: mixed, technicals (MACD) are shifting to sell signals. 1.2601 50-day MA is support. C.S.

AUDCAD


: mixed, direction to come from a break of resistance at 1.04 or support at 1.0284. C.S.

EURUSD


: bearish, all signals are generating sell signals and EUR has broken below its range. C.S

GBPUSD


: mixed - momentum indicators are bearish, support expected at 1.5950 & 1.5920. E.T.

USDJPY


: bullish - consolidation around 80.20 paving way for further gains. E.T.

30 Day

Hist Vol

Spot MACD

9 & 21-

day MA

DMI RSI

Pivot 1st

Support

Pivot 1st

Resist.

USDCAD 6.3 0.9940 buy buy buy 56 0.9928 0.9964

EURUSD 6.7 1.2783 sel l sel l sel l 37 1.2750 1.2829

GBPUSD 6.0 1.5971 sel l buy sel l 43 1.5939 1.6021

USDCHF 6.6 0.9442 buy buy buy 62 0.9409 0.9465

USDJPY 5.3 80.21 buy buy buy 63 79.93 80.53

AUDUSD 7.6 1.0435 buy buy buy 58 1.0366 1.0471

USDMXN 6.5 12.99 buy buy buy 54 12.98 13.04

DXY (USD index) 5.4 80.69 buy na buy 64 80.51 80.86

EURCAD 7.2 1.2706 sel l buy sel l 42 1 .2680 1.2756

GBPCAD 6.7 1.5874 sel l buy buy 49 1.5857 1.5924

AUDCAD 7.3 1.0373 buy buy buy 63 1.0309 1.0413

CADMXN 5.9 13.07 buy sel l sel l 49 13.06 13.10

BoC Noon Rate 0.9965


11/6/2012


Technicals: buy/sell signals and pivot levels



Source: Scotiabank & Bloomberg


Glob al FX Research Tuesday, November 06, 2012

This report is prepared by The Bank of Nova Scotia (Scotiabank) as a resource for clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date

hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or

warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which The Bank or its affiliates

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CONTACTS - GLOBAL FX STRATEGY

THE MAJORS & PRIMARY CURRENCIES



Camilla Sutton Chief Currency Strategist 416-866-5470 Camilla.Sutton@scotiabank.com

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


LATAM



Eduardo Suarez Senior Currency Strategist 416-945-4538 Eduardo.Suarez@scotiabank.com


ASIA



Sacha Tihanyi Senior Currency Strategist 852-6117-6070 Sacha.Tihanyi@scotiabank.com

Should you wish to be added to anyone of our three distribution lists, please reach out to one of the above authors.


Please join us for our FX Outlook Conference Call



: Hosted by Camilla Sutton on November 5, 2012

Dial: 905-694-9451

Passcode: 336 571 076#

Presentation at http://www.scotiafx.com/conference/index.htm

This call discusses:

The five macro themes that are likely to shape 2013 and a brief overview of our 2013 forecasts:

1) Global growth, US outperforms and China engineers a soft landing.

2) Europe still important but fades compared to how it drove 2012.

3) The US outlook.

4) Central bank policy – Fed policy on a relative global basis is only USD positive against EUR and

JPY, but still USD negative against CAD.

5) Politics – elections and leadership changes in China, the US, Germany and Japan.


Today's Releases & Speakers



Time

(EST)

Country Release Period Cons Last Significance

10:00 CA Ivey Purchasing Managers Index SA Oct 58.2 60.4 med-high

10:00 UK NIESR GDP Estimate Oct -- 0.8% med

15:30 CA Canada Finance Minister Flaherty Speaks at Senate Committee med

03:00 SZ SNB publishes foreign currency reserves med

03:15 SZ CPI - EU Harmonised (MoM) Oct -- 0.7% med

03:15 SZ CPI - EU Harmonised (YoY) Oct -- -0.3% med

03:30 SW Riksbank Minutes from Rate Meeting Released med

05:00 EC Euro-Zone Retail Sales (MoM) Sep -0.1% 0.1% med

05:00 EC Euro-Zone Retail Sales (YoY) Sep -0.8% -1.3% med

06:00 GE Industrial Production MoM (sa) Sep -0.7% -0.5% med-high

06:00 GE Industrial Prod. YoY (nsa wda) Sep 0.1% -1.4% med-high

07:10 EC ECB President Draghi Speaks at Banking Sector Meeting in Frankfurt

high

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