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Foreign Exchange

Kiwi takes flight on Chinese easing hopes

The New Zealand dollar led commodity-linked currencies higher as Chinese trade data raised speculation over further monetary stimulus from Beijing, while EURCHF tested its lows after the departure of Philipp Hildebrand as SNB chairman.

Headlines • Chinese December export growth slows to 13.4% from 13.8% y/y ; import growth slows to 11.8% from 22.1%

• Australian building approvals rise 8.4% m/m in November – above the consensus forecast of 6.5%.

• UK BRC retail sales jump 2.2% y/y in December, a much stronger rebound than expected

• Banks’ overnight deposits with the ECB hit a fresh record of €481.9 billion

• Fitch does not expect to downgrade France in 2012 and Germany's AAA rating is safe

Market reaction and flows

Commodity-linked currencies were in demand on Tuesday as optimism over global growth was boosted by expectations of further monetary easing from China.

Weak Chinese import data drove speculation that Beijing would introduce further measures aimed at stimulating the economy. Upbeat comments from Alcoa, the aluminium producer that kicked off the US earnings season overnight, and easing tensions in the dollar funding market also helped Asian shares higher and lifted demand for risky assets.

The New Zealand dollar led the rally in commodity-linked currencies. NZDUSD rose more than 1% after breaking through its 100-day moving average at $0.7890, while demand for the kiwi also picked up after EURNZD broke down through its N$1.6205 low from August.

Traders noted strong demand from funds and exporters on any pullback in the NZD.

The move in the NZD helped AUDUSD trade higher through $1.0300, while further support for the Aussie came from strong building approvals. USDCAD also came under pressure.

It was a relatively volatile session for EURUSD, despite the robust performance from commodity-linked currencies, reinforcing the recent evidence that moves in the currency pair have decoupled from risky assets.

EURUSD found support around $1.2740, with persistent demand from a supranational account pushing it up through $1.2800. EURUSD now eyes a break of Friday’s high at $1.2813, though offers from real money managers and macro accounts from $1.2820 to $1.2850 should temper its progress.

EURGBP remained capped around £0.8285, with sterling finding little support from strong UK retail sales figures. GBPUSD briefly moved above $1.55, but failed to hold on to its gains, with traders noting offers around $1.5530.

Meanwhile, EURCHF threatened option barriers around SFr1.2100 in early trade as investors tested the resolve of the Swiss National Bank to enforce the SFr1.20 floor in EURCHF after the resignation of Philipp Hildebrand as chairman of the central bank on Monday.

Some called the credibility of the SNB into question in the wake of the Hildebrand debacle, but talk that the central bank had been active in the forwards markets helped EURCHF to pull higher from its lows.


Morgan Stanley’s positioning tracker, which includes IMM data as well as six other indicators, largely echoes the latest CFTC data and shows currency positioning still heavily reflects the risk aversion in the market. Morgan Stanley estimates the largest long position to be in USD, now close to extreme levels, followed by JPY and SEK.

Most other G10 currencies are in neutral-to-short territory, with the largest short positions in EUR but also, contrary to what CFTC data indicates, in NZD and closely followed by CAD and NOK.

Overall positioning score 
 Source: Morgan Stanley

The Morgan Stanley positioning tracker takes into account proprietary flow data, foreign currency investments from Japanese Toshin accounts, margin account transactions on the Tokyo Financial Exchange, and currency managers’ and macro hedge fund performance. Options

Vols are slightly higher across the board in Europe, even though JPY vols were offered in the Asian session (AUD/JPY and EUR/JPY vols opened 0.5 vols lower on average).

EUR/USD curve is now in demand, as one-week and one-month vols are up by 1.3 and 0.7 vols respectively.

EUR/CHF vols reflect that the option market does not believe that the 1.20 peg is at risk. We saw the 1.20 strike on one-month trading at 5% vol. That is the only pair trading at a vol lower than on Monday.

What to look for

CAD has been the worst performing ‘risky’ currency since the start of the year, dropping about 0.25% versus the USD, but a rally in USDCAD above C$1.02 could provide a good selling opportunity for the undervalued currency, says Bob Sinche, chief currency strategist at RBS.

The bank’s short-term fair-value model – which includes the five-year swap rate spread, the price of crude oil and the level of the S&P 500 index – suggests that USDCAD should be trading close to parity.

“Positioning indicators show short positioning in CAD is close to extreme levels and at the same time we continue to view the fundamental environment as supportive for the CAD,” says Sinche.

The divergence between spot and RBS’s short-term fair value is near the widest levels seen over recent years. Accordingly, Sinche recommends establishing short USDCAD at C$1.0260, targeting a test of the 200-day moving average, currently at C$0.9914, with a stop on a two-day close above C$1.0424, the recent December high.

USDCAD vs RBS Fair-value estimation 
 Source: RBS

Spot, 6.30am, EST


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