GBP Underperforms

Overall, currencies remain well bid against the USD, with the Euro once again looking to extend gains to fresh yearly highs beyond 1.3700 on Tuesday. A combination of hawkish comments from ECB President Trichet and improved sentiment towards the Eurozone, in light of what appears to be a comprehensive support package, have contributed to the relative strength. Technically, while we continue to look for opportunities to buy USD’s over the medium-term, there is certainly room for additional Euro gains from here, and we eye a potential move just shy of 1.4000 before the market once again looks to roll over in favor of broader USD gains.

Relative Performance Versus USD Tuesday (As of 10:00GMT)

1. SWISSIE+0.24%
2. YEN +0.23%
3. KIWI+0.10%
4. EURO-0.11%
5. CAD-0.22%
6. AUSSIE-0.31%
7. STERLING-1.26%

The big story on the day has come out of the UK, with the Pound showing weakness all day and then accelerating to the downside following a much weaker than expected growth reading. This opened a drop of well over 200 points in Cable on the day and put pressure on the UK against the other major currencies as well. Of course, attempts were made to mitigate the results, with Chancellor Osborne downplaying the results of the weather impacted data. The Bank of England is in a tough position where they need to balance between the threat of rising inflation (which is very real) and a shaky economic recovery. The Sterling market had been well bid in recent days on stable economic results and higher inflation readings, but has since come back under pressure following the latest GDP result.

Elsewhere, the Australian Dollar has also been loser on the day. Although the single currency is only marginally lower on the day against the buck at this point, we continue to see relative weakness ahead, with a combination of softer economic data and narrowing yield differentials in favor of other major currencies driving the relative weakness. The latest inflation data certainly does not help the antipodean’s cause, with a much softer CPI print earlier today, providing added support for the idea that the RBA will continue to remain on hold going forward. The Australian central bank has been in a period of transition, with the RBA moving away from a hawkish monetary policy to a more balanced policy. Meanwhile, other major central banks look to be on the verge of shifting away (if they have not done so already) from super accommodative policies.

Moving on, as was widely expected, the Bank of Japan came out and left rates unchanged with the overnight call rate holding at 0-1.10%. Meanwhile, the BOJ maintained its economic assessment with economic growth in 2011, 20112 and 2013 seen growing at 3.3%, 1.6% and 2.0% respectively. Also in Japan, MOF Noda said that the 2011 budget needed to be passed by the end of March to rid deflationary concerns, but there has been some resistance within the government and the passage of the budget may prove to be a difficult task with some speculating that PM Kan will have to make some serious personnel changes in order to achieve government goals re the budget.

On the strategy side, we have been looking for opportunities to buy USD/CAD on dips in recent days, and USD/CHF is now back on our radar, with a move towards the 0.9400 figure viewed as a potential counter-trend long opportunity. We will let you know as things progress throughout the day, but right now, it looks as though our next recommendation will be in one of these two currencies.

Looking ahead, all eyes turn to Canada, where inflation data (CPI- 0.2% expected) is set for release at 12:00GMT. US Case Shiller (-0.9% expected) is then out at 14:00GMT, with consumer confidence (54.3 expected), the house price index (0.0% expected) and Richmond Fed manufacturing (23 expected) capping things off at 15:00GMT. US equity futures are marginally lower while commodities are being hit harder with oil down some 1.50% and gold off by 0.50%.

TECHNICAL OUTLOOK

EUR/USD:The recent break back above 1.3500 has signaled a shift in the short-term structure and now potentially opens the door for additional upside over the coming days back towards the 1.4000 area. Next key topside resistance comes in by 1.3745 (61.8% of Nov-Dec move, while above exposes the 78.6% fib retrace off of the same move at 1.3985. Overall however, our core bias remains net USD bullish and as such, rallies to 1.3985 this week will be aggressively sold. In the interim, a break and close back below 1.3540 will be required to relieve topside pressures.

USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.

GBP/USD: A major bearish reversal day in the works and could now confirm a fresh lower top in place by 1.6060 ahead of the next major downside extension. Tuesday’s break back below 1.5840 helps to strengthen bearish bias, while a daily close below this level will further reaffirm. From here, look for any intraday rallies to be well capped ahead of 1.5900 in favor of a drop towards next support by 1.5665 further down. Only back above 1.6060 negates.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Look for the current setbacks to be well supported on a close basis above 0.9400, with a fresh higher low sought out ahead of the next major upside extension beyond 0.9785.

TRADE OF THE DAY

GBP/CHF:While we acknowledge that on the fundamental front today’s data was certainly not pretty, we also can not ignore intraday technicals which are showing severely oversold. The daily ATR has already been well exceeded and hourly studies are violently stretched. On the daily chart we see evidence of longer-term basing, and as such we like the idea of buying into this latest dip below critical psychological barriers by 1.5000 in anticipation of a fresh higher low above the record lows set in late 2010. A key 50% fib retrace off of the latest Dec-Jan low high move and some solid previous resistance now turned support come in by the 1.4900 figure, and we will use this figure as our ideal entry for today’s trade. STRATEGY: BUY @1.4900 FOR AN OPEN OBJECTIVE; STOP 1.4730. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.

China Data Leaked

Chinese Data Leak Benefits Aussie, Euro, Sterling

Risk was well bid overnight as world stocks rose to levels not seen in just shy of two and a half years. Apple released strong results and the outlook for the future is rosy given sales of the iPhone and iPad; meanwhile, IBM also impressed by delivering a better-than-expected profit on the quarter. That being said, there were some mixed results out of Goldman Sachs and Wells Fargo, which has contained the elation-driven buoyancy somewhat this morning.
In Asia, there were reports out of Hong Kong that Chinese inflation data, which will be heavily viewed this evening, is slated to come out on expectations. We’ll see if this leak proves to be true, but calming inflation in China is very positive for stocks and risk trades because it means that the government may not have to impose more tightening rules to curb growth and rising price pressures.  The CPI data will be read at 9:00pm EST tonight, and if the levels deviate from the 4.7% expected (or 4.6% leaked), it will likely play a major factor in the night’s—and the rest of the week’s—sentiment.
The leak, combined with the after-the-bell earnings releases, made investors rather bullish, which saw them moving away from the US dollar to invest in emerging markets and equities rather than in bonds. The Australian dollar was one of the biggest winners on the day, cruising through parity with the US and now sitting up roughly 0.6% on the day. The EUR actually gained even more and is up close to 1% as fears over the debt problems have taken a backseat for the time being. The common currency continues to climb and now sits close to 1.35 in interbank trade. Though it is above the top end of its range, more gains could be in store if this mood continues. And finally, in the UK, the pound is struggling to remain above the 1.60 mark. It has traded above this figure a few times in the last couple of days, but seems to be consistently met with decent offers, and now sits just under this important level. Similar to the Canadian dollar (see below), traders are hesitant to push it too much higher after the gains witnessed recently. The crosses might have to catch up to the pound before it can push significantly higher against the USD.
Loonie Left Out of Risk Rally
I’d like to talk a little bit about the Canadian dollar. We highlighted the importance of the Bank of Canada decision yesterday; it is interesting to analyze the price action a day later. As noted, most currencies gained against the Big Dollar overnight due to data and risk preference, but the Canadian dollar has lagged considerably. This is both a follow-through from the less-than-hawkish statement released yesterday and proof that, with this move under par, the market has established a “fair valuation” for the near term. At these levels, there are more attractive buys in the market if you want to short the US dollar, but there is also a pervasive belief that Canada should be strong due to its fiscal situation and generally optimistic outlook.
The Bank did note that currency levels might be a drag on the economy, and this is certainly helping to fuel the anti-CAD sentiment today, but the volatility and interest in the currency has waned, leading us to believe that either new data or relative prices with the crosses must change before we see significant changes. On a more technical note, the USDCAD pair posted a bullish outside reversal today, so if the day’s price ends higher than yesterday’s close, it could signal that more short-term weakness is in store for the CAD. That being said, we do feel the general trend is in place, and any significant devaluations in the Loonie will be met with decent buying interest given the fundamentals in Canada.

Euro Close on Wednesday Critical for any Near Term Trades

The Euro has finally managed to take out key topside barriers by 1.3500 on Wednesday and it will now be interesting to see how the market reacts from now into the New York close. A close back above 1.3500 will be viewed as a bullish development and likely open the door for additional upside over the coming days, potentially towards the 1.3800-1.4000 area. However, inability to close above 1.3500 will keep the prevailing structure intact and suggest that the market is still adhering to a well defined multi-day consolidation. This then could open the door for yet another topside failure and bearish resumption back below 1.3000 over the coming sessions.

Relative Performance Versus USD Wednesday (As of 11:35GMT)

1. EURO+0.56%
2. AUSSIE +0.54%
3. SWISSIE+0.47%
4. KIWI+0.44%
5. YEN+0.43%
6. STERLING+0.11%
7. CAD+0.08%

The primary drivers behind the latest surge in the Euro and currencies in general have been the very well bid global equity markets, commitments from Russia, China, India and Japan to buy EFSF debt to support the Euro, and an ongoing lack of concern or sense of urgency from the Fed to look to begin to tighten monetary policy despite rising inflationary pressures. On the data front, Wednesday’s session has been all about the UK, with a batch of employment data coming in across the board better than expected to keep the Pound well propped. Nevertheless, the single currency has failed to extend gains on Wednesday, even with the stronger data, and solid offers have emerged into strength ahead of 1.6100.

Looking ahead, market participants will be sure to focus on US Q4 earning results, and although we have seen some impressive showings from the likes of Apple and IBM, the more important earnings to watch remain those in the financial and banking sectors. State Street, Northern Trust, BONY Mellon, Wells Fargo and Goldman Sachs earnings will all be digested in Wednesday trade and likely to influence broader global macro price action. Meanwhile, on the economic data front, Canada manufacturing shipments (0.5% expected) are due at 13:30GMT along with US housing starts (550k expected) and building approvals (555k expected). US equity futures are slightly offered while commodities are mildly bid. It is however worth noting that the impressive move in equities has now resulted in some overbought daily technical studies which are a red flag for potential weakness in stocks over the coming days.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped below 1.3500 on a close basis ahead of some fresh weakness. The market is still very much trading within a well defined multi-week range. As such, only a close back above 1.3500 would give reason for concern and delay outlook.

USD/JPY: The market appears to be locked in some consolidation with clear directional boas not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside.

GBP/USD: The latest break back above 1.5910 delays bearish prospects for the time being and now opens the door for additional strength towards the key 78.6% fib retrace off of the October-November major move which comes in by 1.6090. Nevertheless, our core bias still remains bearish and any rallies into this fib retrace are viewed as a formidable sell opportunity in favor of some renewed downside pressures. Look for a break and close back below 1.5835 to officially confirm and accelerate. A close above 1.6100 concerns.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of a previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9400 on a close basis.

FLOWS

A French and German name have been seen selling around the top in Eur/Usd with a real money account on the bid, a UK clear has been leading bids in Cable. Momentum types and an ACB seen on the offer in Usd/Cad.

Currencies Well Bid But Euro Still Capped Below Key Resistance

It is good to be back on the desk after being away for a couple of days and in the end, nothing much has really changed. Overall price action in the Euro remains consolidative, with the market stalling out ahead of some key resistance by 1.3500 and rolling back over. The intense Euro rally in the previous week is now being attributed to nothing more than a major bout of profit taking on shorter-term USD long positions, and some market participants are once again back to focusing on broader Eurozone structural deficiencies. Nevertheless, the single currency has been very well supported in Tuesday trade and has found renewed interest on increased optimism over the outlook for the region (EFSF package) and some very solid data in the form of the German ZEW.

Relative Performance Versus USD Tuesday (As of 11:35GMT)

1. EURO+0.89%
2. STERLING +0.72%
3. SWISSIE+0.54%
4. AUSSIE+0.43%
5. CAD+0.24%
6. YEN+0.17%
7. KIWI+0.03%

If one other currency stands out at all in Tuesday trade thus far, it is most certainly the Pound, which outperforms across the board on the back of some solid data and elevated inflation readings. Nationwide consumer confidence came in much better than expected, while RICS house price data was encouraging with the data series producing less of a deterioration than consensus estimates. Meanwhile, the latest CPI readings were through the roof and have added to Sterling’s bid tone as investors start to price in the increased possibility for rate hikes. Consequently, Cable has managed to easily clear psychological barriers by 1.6000. Still, this is a market that we are much more comfortable selling into rallies rather than looking for opportunities to buy, with the overall structure tilted to the downside, and any rallies on strong data and speculation of rate hikes not expected to last.. As such, we have issued a recommendation to sell on a rally to 1.6090 today (see below).

Also on the strategy side of things, while most major currencies are well off of their respective multi-week highs against the Greenback, the Canadian Dollar has been doing its own thing and continues to trade by multi-week highs. In our opinion the currency is not likely to remain well bid for much longer, with longer-term technical and cyclical studies warning of the formation of a major top in the Canadian Dollar. In light of this, we will also be aggressively looking for opportunities to buy USD/CAD on dips into the 0.9800 area.

Elsewhere, China is back in the news as things heat up ahead of President Hu’s visit to Washington, with a Chinese spokesman warning that US lawmakers should avoid harming the overall interest in China/US trade. We will be watching developments here closely but ultimately do not expect to see anything that moves the markets too much on this end.

Looking ahead, there is some key event risk in the North American session, with the Bank of Canada set to decide on rates at 14:00GMT. While no change is expected (1.00%), we would be on the watch for any accompanying language out from the central bank that expresses concern over the relative strength in the Canadian Dollar. With USD/CAD trading by multi-week lows, we would not at all be surprised to see any comments re the strong currency open the door for a decent bout of CAD liquidation. Also out in North American trade is US Empire manufacturing (13.00 expected) at 13:30GMT, TIC flows at 14:00GMT and NAHB housing at 15:00GMT. US equity futures and gold prices are bid, while oil consolidates and trades flat on the day.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3500 range highs ahead of some fresh weakness. As such, the preferred strategy is to stand aside for now and look to sell a little higher up. Ultimately, only a close back above 1.3500 would give reason for concern and delay outlook.

USD/JPY: The market appears to be locked in some consolidation with clear directional boas not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of a previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9400 on a close basis.

FLOWS

An ACB and a Middle Eastern account have been on the bid in Eur/Usd. Usd/Jpy is being supported by cross demand from Japanese names. A Middle East account and a hedge fund have driven gains in Cable. Usd/Chf sales by an ACB which has been seen selling Usd’s across the board.

TRADE OF THE DAY

GBP/USD: The latest break back above 1.5910 delays bearish prospects for the time being and now opens the door for additional strength towards the key 78.6% fib retrace off of the October-November major move which comes in by 1.6090. Nevertheless, our core bias still remains bearish and any rallies into this fib retrace are viewed as a formidable sell opportunity in favor of some renewed downside pressures. A test of this level on Tuesday will also have the daily ATR well exceeded and hourly studies severely overbought to make for a very attractive entry with what should be limited downside risk. Look for a break and close back below 1.5835 to confirm bias and accelerate. A close above 1.6100 concerns.STRATEGY: SELL @1.6090 FOR AN OPEN OBJECTIVE; STOP 1.6215. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.

Risk Trade Softens

Chinese Tightening Weighs On Global Markets

Last week's gains in commodities and growth sensitive currencies came to a halt over the weekend after the People's Bank of China announced that it had raised bank reserve requirements. The central bank lifted borrowing ratios by half a percent, causing the Shanghai Composite stock index to drop almost three percent. Cautious traders trimmed risk positions globally, and the US dollar gained slightly on a trade weighted basis.
After rallying almost four percent last week, the euro slipped in advance of a meeting between European finance ministers today as short covering lost momentum. The group of finance ministers is also expected to work on new rules for future budget deficits while discussing the mechanics behind a permanent aid facility. According to multiple news outlets, Germany is beginning to soften on the idea of increasing its contribution to the sovereign rescue fund and may be considering further fiscal union with the rest of the eurozone.
While weak growth will continue to weigh on investor sentiment, further economic integration could prove decisive in changing perceptions on the euro, while discord would set the exchange rate back on a downward path.
Volumes on North American markets will be light over this trading cycle, with US traders off for Martin Luther King Jr. Day. Consumer spending bellwether Apple will release fourth quarter results tomorrow, providing markets with plenty to chew on.
Bank of Canada Announcement Looms Over Loonie
North of the border, traders are preparing for tomorrow's statement from the Bank of Canada. Few expect the Bank to hike rates tomorrow, but expectations are sharply divided on what will happen farther out. Swap markets have priced in a rate hike by the end of May, and the Bank is expected to raise its forecasts for both the US and Canadian economies in the accompanying statement.
The Canadian dollar continues to pivot around the 0.99 mark against the US dollar, constrained within a relatively tight 100 basis point trading range for much of the last week.
Looking at fourth quarter data for 2010, the Canadian economy appears to have favourable momentum behind it. Trade numbers seem to be improving with US demand, and employment figures have been remarkably stable. High commodity prices are supporting export revenues.
At the same time, the Canadian economy does face challenges. Government stimulus spending is beginning to wind down, and the exchange rate is high enough to damage exporter competitiveness. 
Consumer debt levels are elevated, although recent developments would suggest that Finance Minister Flaherty will soon announce tighter mortgage lending rules in order to directly target consumer borrowing – potentially later today. If this occurs, the Bank would be left to focus on achieving inflation targets more directly.
Brazil Gets Real, Intervenes in Currency Markets Again
In yet another attempt to weaken the real, Brazil’s central bank auctioned $1 billion in reverse currency swaps over the weekend. A reverse swap pays investors overnight interbank rates in reals in exchange for fixed dollar interest rates. The real fell almost a cent against the US dollar as traders assessed the bank’s commitment to holding the currency below the 1.65 level. The central bank has become one of the world’s most active, intervening repeatedly to sell the real against the US dollar. At the same time, Finance Minister Guido Mantegna has authorized the country’s sovereign wealth fund to buy dollars in the futures markets and has tripled taxes on foreign bond purchases.
Mantegna’s shootout with foreign investors and speculators is only one of many occurring in the emerging markets. Responding to a surge of speculative capital from the developed world, at least a dozen countries are attempting to devalue their own currencies relative to their competitors and the US dollar, with varying degrees of success.
Unfortunately, this means that investors are simply going farther afield, pushing capital into countries that would have been considered incredibly risky only two years ago. As the World Bank put it in a recent report, “many of these flows are short lived, volatile and sometimes speculative in nature. Left unchecked, such flows can lead to abrupt real appreciations and depreciations that are out of line with underlying fundamentals and can do lasting damage to economies.” The risk of an emerging market unwind is growing rapidly.
Hu's On First
In advance of his meeting with President Obama later this week, Chinese President Hu Jintao said that "the current international currency system is the product of the past," signalling his country's desire to see the US dollar balanced by other currencies in the years ahead. According to interviews published by the Wall Street Journal and the Washington Post over the weekend (email us for links), President Hu indicated that moves to expand the renminbi's international role will continue. He said "China has made important contribution to the world economy in terms of total economic output and trade, and the renminbi has played a role in the world economic development. But making the renminbi an international currency will be a fairly long process."
President Hu reiterated concerns about the Federal Reserve's quantitative easing programmes, saying that US monetary policy "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level." Along with many other emerging countries, China has seen much of this liquidity flow into domestic investment markets, causing sharp price rises and economic misallocations. 
In discussions about Chinese inflation levels, Hu said that the problem is "on the whole moderate and controllable. We have the confidence, conditions and ability to stabilize the overall price level." He dismissed expectations that the yuan-dollar exchange rate would be increased in an effort to pressure prices, saying "inflation can hardly be the main factor in determining the exchange rate policy."
China has hiked interest rates and tightened bank lending ratios repeatedly over the last year, and is widely expected to continue doing so over the next six months. This ongoing effort represents one of the largest risks for commodity prices (and the Canadian dollar by proxy) over the months ahead. China has become the world’s largest marginal buyer of raw materials and has a significant effect on demand in many other emerging markets. Bulls are hoping that President Hu’s confidence in China’s macroprudential policies is well placed.

North American Crosses Under Pressure

Both Loonie and Greenback Heavily in the Red Today

Early price action in North American markets has both the Loonie and the Greenback taking it on the chin in heavy trading as both units find themselves on the defensive—despite a mixed bag of data both at home and abroad.  The USD Index is down 0.78% on the session, yet the CHF and CAD are the only majors ceding territory to the Big Dollar.  Interestingly, the Swiss National Bank is actively talking down the local unit, thereby justifying its decline on the day. Meanwhile, the Loonie remains under pressure despite a better-than-expected trade balance reading and supportive flows from the $1.8 billion acquisition of the Canadian retailer Zellers by US retail giant Target.
Stateside, the USD is reeling from a surprise increase in weekly jobless claims despite a positive trade balance figure and a slightly higher-than-expected Producer Price Index.  Jobless claims rose to 445K last week, largely confirming the underwhelming Non-Farm Payrolls report that was delivered the previous Friday.  That said, the souring sentiment affecting the dollar has a lot to do with a somewhat more buoyant market atmosphere in Europe today, with both the Bank of England and European Central Bank choosing to hold the line on rates as expected as well as their bond purchase programs, which some market participants clearly thought would be expanded.  Both the pound and euro are moving higher on the session as traders begin to trim their net short positions on both.
Spanish and Italian Bond Auctions Support Risk (at least in Europe)
European markets in general are finding support this morning from the day’s bond auctions in both Spain and Italy, which are being characterized as qualified successes.  Spain was able to offer three billion euros of five-year bonds at an average yield of 4.542%, which of course represents a significant premium to comparable German paper, but a much better-than-expected interest rate.  Markets had expected that Spain would be required to offer a 130 basis point increase on the debt from its last issue, but instead only saw its yield increase by 97 basis points—which is why we have chosen to term it a qualified success. At the end of the day, it is hard to call a 1% rise in your debt service a good thing in the grand scheme of things.  That being said, everything is relative at this point in time, especially for the European periphery nations that find themselves in the midst of a generational fiscal squeeze.  While the yield did creep up materially, the bid-to-cover ratio remained positive at 2 : 1, showing that there is still plenty of interest in Spanish paper. 
Italy held a similar three billion euro five-year bond auction today in addition to another three billion via 15-year paper.  As might be expected, the yields came at a lower premium, with the three-year averaging 3.67% (almost a full percent lower than that of Spain) and the longer date being offered at 5.06%.  That said, while the yields were lower, so were the bid-to-cover ratios, highlighting the fact that investors still seem to have plenty of appetite for chasing yield despite the increased risk.  Overall, peripheral nation yields have come down overnight on the news as interest rates have dropped eight basis points on the session, thereby allowing the market to be a bit more bullish on the currencies as well.
Finally, also supporting the euro this morning is news that the European Commission is said to be close to working out an arrangement to double the size of its EU bailout fund to 1.5 trillion EUR.  Though both France and Germany have been running hot and cold on the idea of bolstering the fund’s cash reserves, it appears that the initiative is gaining steam and that the market is likely to see a final proposal in early February.
USDCAD Drifting Higher
As mentioned above, USDCAD is drifting back towards 0.99 despite some supportive fundamental influences for the currency on the day.  The technicals, however, are pointing to a slight short-term retracement, as a number of factors have conspired to build a base of support for the pair in the 0.9840 area.  Should the 0.99 mark be breached to the topside, one would expect the pair to continue higher to the mid-0.99 area, retracing as high as 0.9940 or 0.9960.

Are Spanish Auction Results Keeping Euro Propped Up?

Although the Euro has managed to mount an impressive recovery, with the market trading well off of the multi-week lows set on Monday by 1.2875, we continue to classify the move as corrective, and fully expect to see a bearish resumption over the coming days. For now, the market has been propped by a potential EU aid package for Portugal, and solid bond auction results out of both Portugal and Spain. Also seen helping to keep the Euro somewhat bid have been comments from Germany’s Merkel who has pledged to protect the Euro with “whatever needed.” However, it is quite evident that despite efforts to intervene on behalf of the ailing Eurozone economy, there is a long road ahead which is likely to produce some unpredictable and unwelcome results. As such, we see any additional gains being well capped below the 1.3300 figure on a close basis, and would recommend considering to build into short positions on a rally towards 1.3300 (no specific trade recommendation here at the moment).

Relative Performance Versus USD Thursday (As of 11:05GMT)

1. KIWI+0.42%
2. EURO -0.01%
3. AUSSIE-0.02%
4. YEN-0.07%
5. STERLING-0.10%
6. CAD-0.22%
7. SWISSIE-0.69%

There is some event risk worth mention today, although we do not expect any surprises. Both the ECB and BOE are scheduled for rate decisions, and as is usually the case, the risk from the BOE comes from any changes to the QE program, while risks to the ECB decision will originate from the post decision Trichet press conference. At the end of the day, we do not expect to see any surprises from either central bank, but will be watching closely should anything materialize. While the beleaguered Eurozone peripherals are obviously problematic for the health of the Eurozone economy, we expect Trichet to downplay any such threats and maintain a less pessimistic outlook. Meanwhile, UK inflation data has been concerning of late and definitely makes it harder to justify the ultra accommodative monetary policy, but here too we do not expect any changes with the central bank still needing to focus on the current economic recovery. Data released in Europe overnight has failed to materially influence price action with German wholesale sales improving from the previous month, while UK data was mixed with industrial production slightly weaker and manufacturing production a little stronger.

Moving on, although price action in the Australian Dollar is rather subdued on Thursday thus far, we would be on the lookout for a pickup in volatility over the coming hours. While the currency still remains well bid on dips for now, the much weaker than expected employment data only helps to reaffirm our downgraded outlook for the local economy. Economic data results over the past few months are not as promising as they once were, and we continue to see risks to the downside in the Australian Dollar despite the attractive yield differentials. December jobs data showed a net gain of only 2.3k after the market had been looking for an increase of 25k. Additionally, while the unemployment rate showed a drop to 5.0% ,which was on the surface better than expected, the decline was more likely due to a lower participation rate due to a softer overall employment sector.

In terms of where the value lies at the moment and over the coming sessions, we continue to look to the Canadian Dollar as a currency that is on the verge of a sizeable depreciation. This currency has held up so well over the past few sessions, and USD/CAD trades by multi-month lows into the 0.9800’s thus far. Cyclically, the market looks to be quite stretched, and our technical studies suggest that a major trend shift is on the horizon. At this point the fundamental catalyst has yet to present itself, but we will be paying close attention. Our strategy will be to continue to look for opportunities to buy USD/CAD on overdone intraday dips in anticipation of said correction. On Wednesday we had issued a buy recommendation that never materialized, and we will once again look to be buyers at lower levels in Thursday trade if given the chance. Also on the strategy front, we have finally exited our entire EUR/CHF long position from 1.2550 at 1.2825 on Thursday for a nice profit.

Looking ahead, the BOE (unchanged 0.50% and 200B) and ECB (unchanged 1.00% expected) rate decisions filter over into the North American open at 12:00GMT and 12:45GMT respectively. The attention then shifts to North American economic data at 13:30GMT with the release of US producer prices (0.2% expected), the trade balance (-$41B expected), initial jobless claims (402k expected), continuing claims (4100k expected), and Canada international merchandise trade (-C2.0B expected). US equity futures and commodity prices are tracking lower, led by moderate declines in gold prices.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875 earlier this week, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3300 area ahead of some fresh weakness. As such, the preferred strategy is to stand aside for now and look to sell a little higher up. Ultimately, only a close back above 1.3300 would give reason for concern and delay outlook.

USD/JPY: The market appears to be locked in some consolidation with clear directional boas not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside.

GBP/USD: As we had written in our commentary from previous daily analysis, the current bounce was not to be unexpected despite our bearish outlook, with the market in the process of carving out a fresh lower top below 1.5900 ahead of the next downside extension. At this point, we do not see gains extending much further and would recommend looking to consider selling rallies towards 1.5850 on Thursday.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of the previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9500 on a close basis.

FLOWS

An ACB has been selling around the day’s highs in Eur/Usd along with Middle East and Eastern European sellers. Export sales reported in Usd/Jpy with a real money account on the bid. A corporate account has been a dip buyer in Nzd/Usd.