Updated March 12, 2010

Good morning.

The USD is generally lower across the board with the broader USD index down 0.7%. Fundamentally nothing has really changed with the price action more than likely being determined by short covering in the Euro and to a lesser degree the Pound against a number of the majors. That said, the Euro zone did report a much better than expected reading on industrial production for January, posting a monthly gain of 1.7% against expectations of 0.7%. Even with the rebound in the Euro and Pound, it is not going to be enough for us to change our view with the weakness in both likely to resume. The Yen on the other hand is lagging the rest of the majors amid mounting speculation that the BoJ will have to do more to prevent deflation. In addition the Finance Minister said that “the Government has the option of intervention when currency moves are rapid.” This follows on from the PM’s calls for international cooperation to weaken the Yen as it did not reflect the strength and fundamentals of the Japanese economy. On that topic, Japan reported slightly better than expected final reading for January’s industrial production

Elsewhere on the data front, Germany’s wholesale price index for February was weaker than expected, coming in at 0.1% against expectations of 0.3%. France’s current account deficit for January was €3.4 bln versus an expected €3.9bln.

Turning to North America, the US gets retail sales for February with the market looking for a decline of 0.2%, with BMO Economics looking for a slight gain citing “A decent pickup in chain-store receipts in February (despite the East Coast blizzards) likely more than offset a pullback in unit auto sales (partly due to Toyota’s recall woes) and softer gasoline prices to lift retail sales slightly in February after a solid 0.5% gain in January. Excluding autos and gas, sales are expected to climb 0.2%. Given the decent start to the year and the assumed further gain in February, real consumer spending probably strengthened to a 3% annualized rate in Q1 from the modest 1.7% clip in Q4.” In addition to retail sales, the US also gets business inventories for January and the March University of Michigan consumer confidence number.

North of the border the focal point has been the employment data for February. Market consensus had been looking for a gain of 15.5K with the whisper number closer to 25K. At first glance the number was in line with market expectations, posting a gain of 20.9K however the details of the report were much more encouraging, particularly the fact that full time jobs were up 60.2K with the unemployment rate dropping to 8.2%. According to BMO Economics “Today’s solid report is another indication that Canada’s job market is getting back on terra firma. Employment is now up from year-ago levels (+0.5%), miles away from the still-wicked 2.5% y/y drop in U.S. payrolls. Similarly, Canada’s unemployment rate is now only slightly above a year ago (8.0% last February), as the labour market continues to gradually heal. The strength in February looks real, with the advance in full-time jobs quite an impressive achievement, and apparently without much of an artificial boost from the Olympics and/or the mild weather. The countdown clock for Bank of Canada rate hikes is ticking louder by the day.”

As for the C$, USDCAD has finally broken out of the range that seems to have defined it for the past few months and more importantly taken out last year’s low of 1.0207. One thing to take away from the data is that it should provide the CAD with the boost it needs to heads back towards parity, with the only question now being how soon. To that I would suggest sooner rather than later. Off the daily charts USDCAD looks to continue to move lower while the momentum indicators are starting to push into oversold territory. The weekly charts are a little more clear, suggesting the move lower with the MACD about to cross over suggesting a deeper extension. The shorter term intraday charts however suggest that the pair is oversold with the risk of a correction. That said, with the long awaited break in USDCAD finally here, any move higher should find good selling interest. As for the CAD crosses, they are all relatively unchanged and if anything the C$ is lagging the Euro and Pound. That said, it should be a temporary situation with the C$ likely to outperform in the medium and longer term. AUDCAD is also a bit interesting again with the pair back through the 200 day MA and the momentum indicators looking to turn lower.

Expected range: 1.0135 – 1.0235.
Jon Gencher

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