China Supporting EU, CAD Weakens

China Supports EU, Moody’s Threatens

With the holiday season in full swing, yesterday’s New York session saw equity markets, as well as the big dollar end up with mixed results.  Thin “festive” liquidity, coupled with a bare (American) economic calendar was the main drivers leading up to the NY close in what could be described as a fairly lackluster trading day.  Picking up where Wall Street left off, price action throughout the subsequent Asian sitting continued to be choppy as market participants waited patiently for something material to sink their teeth into.  Investors got their wish after comments out of China were made supporting the European Union’s efforts in bringing financial consistency to the Eurozone.  Speaking at an EU/China summit in Beijing, Vice Premier Wang stated that China assures “concrete action” to assist the EU in taming the sovereign debt issue that has hampered the area for the bulk of the calendar year.  The supportive comments instantly gave overnight equities, commodities, and the EUR a quick lift at the expense of the safe haven USD that was quickly sold-off across the board.

As market bulls simultaneously cheered the Chinese support pledge while watching green figures flicker on their trading screens, a major ratings agency quickly threw cold water on the “risk on” parade and reversed investor sentiment in the blink of an eye.  Moody’s has put Portugal’s credit on review for a possible downgrade of their A1 long-term, and Prime-1 short term government bond ratings.  Citing uncertainties about the peripheral nation’s growth after the introduction of their austerity budget, Moody’s continues to clearly be concerned over Eurozone debt.  The ratings house also mentioned that they would not deem it “negative” if Portugal were to reach out to the EU and request access the European Financial Stability Facility.  After the downgrade warning hit the wires, the Euro pared previous gains achieved just hours before as the credit news quickly offset optimism brought on by the supportive remarks from China.  Oddly enough, while the EUR took a hair cut after Moody’s stepped in, equity marts and commodities largely ignored the knock to sentiment and climbed to fresh highs.  The European based Dow Stoxx 600 Index notched a new two-year pinnacle, while copper jumped to all-time highs in London and its best level in at least 22 years in New York trading.
CAD Weakens Despite Surging Commodities
In the wake of the recent climb in commodity prices of late, one would think that the Canadian Dollar would be a major benefactor in the surge of natural resources.  While commodity based currencies such as the Aussie and Kiwi Dollars track higher versus the Greenback, the Loonie has gone against the grain and has fought since the middle of last week to stay afloat.  The CAD took a major hit Monday off the back of weaker than expected October Wholesale Sales data (0.0% vs. 0.8%), packaged along with Bank of Canada concerns of domestic outflows.  This morning’s release of unexpectedly soft November Consumer Price Index stats only reinforce the direction the BoC is looking in terms of monetary policy.  Today’s data reveals a turnaround in the sharp acceleration of growth seen in October, leaving 2010 inflation at moderate (non-threatening) levels which support the Canadian central bank in keeping  lending rates constant through the first quarter of 2011.  In terms of medium-term price action from a technical standpoint, USDCAD has cruised through both the 21 and 55 day SMAs, a bearish signal that potentially calls for extended weakness in the Canadian currency.  Despite a technically weak bias, market participants cannot ignore the historical ties that the CAD and commodities own.  So long as commodities continue to fly, be on the lookout for a prospective reversal in the Loonie’s recent misfortunes.
By Jamie Heighway, Market Analyst