FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open (*corrected)

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View for the day

CAD is sharply higher today following hawkish commentary from the Bank of Canada accompanying the rate decision which held overnight rates unchanged at 0.25%. Specifically, the BoC removed the conditional commitment to keep rates steady through end of 2010:Q2. That statement has now states that it is “appropriate to begin to lessen the degree of monetary stimulus.” In addition, today's statement noted that global economic growth has been "somewhat stronger than projected," which is important because policy is sensitive to the cyclically-driven prices of commodities. Projections of economic growth for 2010 were upgraded to +3.7% from the previous +2.9% while 2011 is now expected at +3.1% from the previous 3.5% In other words, the two-year average was upgraded to +3.4% from +3.2% and the BoC stated that the Canadian economy will return to "full capacity" in 2011:Q2. Previously, they expected that to happen in 2011:Q3. In all, today's statement by the BoC was much more hawkish than the one issued in January. The next scheduled policy meeting is on June 1, 2010. Although a rate hike is not baked in the cake for that time, there is nothing preventing the central bank from doing so if the numbers continue to surprise to the upside and the 3-month OIS market has now fully priced in a 25bp increase on that date. Today's policy statement was hawkish and thus bullish for CAD, which is currently trading higher by 1.5% in afternoon trading.

Elsewhere in markets, a large set of positive earnings this morning is helping propel equities higher today, with US indices trading about 0.7% higher at time of writing, and front end yields moving steadily higher in tandem with the general tone. With the exception of CAD, high beta FX has generally traded sideways, consolidating overnight gains. Despite this, AUD remains about 0.8% higher against the USD and GBP is up about 0.25%. With the move higher in yields, JPY is today’s big loser, down sharply against the USD and on the crosses. After the close today, keep an eye out for a few notable earnings releases including Apple and Yahoo.

Overnight news

USD: Bank of New York Melon EPS for 1Q was $0.59 (JPM : 0530, Cons : 0.528) ; Goldman Sachs reported 1Q EPS of $5.59 (Cons : 4.148); Coca Cola reported 1Q EPS of 0.80 (JPM : 0.750, Cons : 0.738); State Street reported 1Q EPS of $0.75 (JPM : 0.750, Cons : 0.766) ; Johnson & Johnson reported 1Q EPS $1.29 (JPM : 1.300, Cons : 1273) ; US Bancorp reported 1Q EPS of $0.36 (JPM : 0.340, Cons : 0.339)

CAD: BoC rate announcement left rates unchanged but the accompanying commentary dropped the conditional commitment to keep rates unchanged until July, stating that it is appropriate to lessen the degree of monetary stimulus with economy recovering somewhat more than expected.

SEK: Riksbank leaves rates on hold at 0.255 but continues to signal hikes in Q3

EUR: German ZEW survey is stronger than expected, rising to 53.0. Greek T-bill auction delivers a strong bid/cover ratio. However, 10yr bond spreads to Germany widen further

GBP: CPI is stronger than expected, rising 3.4% y/y. UK opinion polls still show Liberal Democrats maintaining strong gains from last week.

Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)

USD : Apple for 1Q @ Aft-Mkt (JPM : 2.700, Cons : 2.465) ; Yahoo for 1Q @ Aft-Mkt (Cons : 0.139)

AUD : Westpac leading index (%m/m, sa) for Feb @ 01 :30

JPY : BoJ Deputy Governor Nishimura speaks @ 03:00 ; Leading index final (CI) for Feb ; Coincident index final (CI) for Feb

THB : BoT rate announcement (JPM : 1.5, Cons : 125)

GBP : BoE releases minutes @ 09:30 ; Unemployment rate (%, sa) for Feb (Cons : 4.9) ; Claimant count (000’s ch, m/m, sa) @ 09 :30 ; Average earnings (3M, %oya, sa) for Feb (Cons : 2.4, JPM : 2.4)

EUR : Portugal to auction EUR 0.5bn 9-month bills @ 10 :50 ; Portugal to auction EUR 0.5bn 3-month bills @ 10 :50 ; German Finance Minister Schaeuble to speak to German lawmakers on the Greek crisis.

Overnight price action

FX: High beta currencies hold on to overnight gains while CAD shoots higher following BoC comments.

FX vol: Vols are lower across the board as risk markets rally.

Commodities: Gold is up 0.5% while oil is up nearly 2.5%.

Bonds: Yields are higher by 3bp in the front end and flat to down 1bp farther out the curve. 2s/10s is 2.79bp.

Equities: US equities are higher by 0.8%.

Technical View for the day

High beta led the way yesterday in line with the bullish shift in risk following the two-day corrective phase. As the equity rally is making a case for new highs, yesterday’s focus was on CAD with the sharp rally reasserting the bull bias and suggesting an extension is underway. While USD/CAD is now retesting the recent .9954 low, the odds suggest a higher risk of a downside break into the critical 1H’08 lows between .9820/.9710. The action on the crosses confirms highlighted by yesterday’s sharp, impulsive rally in CAD/JPY. Following yesterday’s break above the key 92.00/15 area, which has left the decline from the early-April high with a corrective bias, new highs are now likely with short term targets in the 95/97 zone. We continue to see downside potential for NZD/CAD with yesterday’s bearish outside day down after failing against the short term range highs suggesting a higher risk that the corrective phase from the April low is now complete.

The bearish shift for JPY remains intact as this week’s reversal suggests the underlying trends are back on track. For USD/JPY, the short term risks suggest higher prices given the break above the recent 92.55/80 breakdown area as well as the 93.13 downtrendline from the early-April high. In turn, the odds that this short term corrective phase is now complete have increased implying a retest, if not break of the highs is now likely. The bullish shift in the crosses affirms this view with AUD/JPY now positioned for a push to new highs. Similarly, GBP/JPY is now in position for a retest, if not break of the recent highs.

The impulsive reversal in AUD/USD from Monday’s low also suggests a higher risk that the corrective phase from last week’s high is now complete. With the shift back above the key .9220 area, the focus is back on the .9400 medium term range highs. Similarly, AUD/NZD is in position for another run higher after holding the 1.2950 support area amid an improved momentum setup, particularly as NZD/USD continues to range below the critical .7200/25 resistance zone.

ENDS

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