Daily Forex Focus – 18 January

Asian equities are still digesting China’s exceedingly weak December Home Prices release with prices falling in 52 of 70 cities monitored and declining for a 4th straight month. China has not moved to ease further yet because inflation is still running high considering GDP figures. The Nikkei is leading equities higher, adding 110.92 points or 1.31% to 8577.32. The Hang Seng and ASX are both marginally higher but still digesting the cooling Chinese housing data. New Zealand is the bright spot of today’s session as the New Zealand Dollar is one of the best performing currencies during the Asian session, rising 0.3358% to 0.8030 versus the USD. Copper continues to extend gains after a 2.5% rise in the last two sessions, trading up 0.43% to $3.7455.

Oil has moved substantially higher, topping $101.31 as the tensions in Iran support elevated prices and worldwide manufacturing continues to show expansion. The NY Empire State Manufacturing Index showed tremendous gains, growing at the fastest pace in 9 months. U.S. Markets were firmer yesterday, as the tech weighted Nasdaq rose 0.64%, followed by the Dow and S&P 500 which each rose 0.48% and 0.36%. Equities, which are in the midst of earnings season, have seen weaker than expected performance from financials who have seen revenue drop to levels not seen since 2008, led lower by JP Morgan and Citigroup. One important release was the World Bank report which cut global growth forecasts by the most in 3-years, noting that the contagion from the European crisis will likely affect emerging markets.

The resurgence in risk appetite that manifested itself during the Asian session on the back of Chinese GDP numbers (not too cold AND not too hot) and improved German data (ZEW), abated somewhat on the move into the NA session. To be sure, local data was risk supportive with the release of a solid Empire manufacturing survey. The Empire is the first of the January US sentiment indices and kicks-off on a strong footing at 13.48 up from 8.19 and better than the 11.0 expected. Since mid-December, tech stocks have been steadily rallying providing for a positive back drop to the Empire index that tends to be heavy in tech and textiles. The components were encouraging as well with strong showings for employment, and new orders. By mid-afternoon, Wall Street was drifting lower but still comfortably above last Thursday’s closing levels.

Some of the pull on risk can be attributed to a less than sturdy earnings profile today. Still, EU sovereign downgrades have failed to impede neither the issuance of debt nor the ability of risk to rally. Portugal seems to be one exception as yields in the 10-year bucket under-performed rather spectacularly of late, although at the close of the European session they had tightened in by 29 bps. Small beer in comparison to yesterday’s 190 bps move wider. In FX, the higher beta names in the G-10 found favour with SEK, NZD and AUD to the top of the table. USD pushed onto its back foot with only JPY putting in a worse performance as safe havens find little favour.

EUR/USD S&P cut the ratings on 25 GRE’s today, a part and parcel of the natural progression of events following cuts to the sovereign. More talk of a Greece default but that hasn’t really turned markets off risk. T-bills out of the periphery continue to find a home. However, the real test of the market’s metal comes Thursday when Spain will put nearly “5.0bn in 4-, 7-, and 10-year paper onto the market. Ahead of that, Portugal will be issuing T-bills Wednesday (along with a 2-year German tap) in its first foray into markets since having its ratings cut to below investment grade by S&P. Early on into the NA session, EUR/USD put in its highs for the day, just shy of last Thursday’s closing level ($1.2814) before minor profit-taking. EUR/USD looks to be still very much in the clutches of that downward sloping channel begun in early November although some may be looking to play a relief rally somewhere in here.

CAD: The international securities transactions data for the month of November reflected strong investor interest in Canada with a net purchase of Canadian securities of nearly C$15bn, the second largest net purchase in 2011. While CAD softened in November, it was nonetheless one of the best performing USD crosses over the period, second only to JPY. At today’s BoC rate decision the overnight rate was left unchanged, and chased up with a ‘cautious’ outlook. Not a lot of surprise in that although the caution was in some sense tempered by a necessary upward revision to growth in 2011, to account for the upside on the economy in 2H11 (2.4 v 2.1) and a ‘tweaking’ of the 2012 story (2.0 v 1.9) although the 2013 outlook gets cannibalized (2.8 v 2.9). Today we will get a more fulsome fleshing out of the BoC’s economic base case with the release of the MPR. One troubling aspect is a continued reliance for growth upon an overly leveraged consumer as business investment took an uncertain turn in 3Q11.

Despite the sombre note sounded by the BoC, USD/CAD continues to hold in below yesterday’s closing levels. AUD/CAD after having caught a bid in the Asian session, bested Friday’s high during European hours with a print of 1.0571 before heading lower into the North American morning session. AUD: Briefly broke through its 200-dma (1.0412) to touch 1.0450 before falling back below 1.04. Since November, rallies in AUD/USD have generally been contained by the 200-dma with today being the first break since early November. China remains in focus as a chief driver behind the market disposition for the antipodean dollars, which may draw some attention to a December property prices report out of China due mid day Asia.