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
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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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