Updated March 19, 2010

Good morning.

The USD is generally better bid against most of the majors although volumes and activity are generally light. The Euro is close to the lows for the week as the Greek situation continues to develop, with a fair amount of concern that Greece will fail to secure the financial assistance necessary from the EU. On one hand it seems that the French prefer that the matter be resolved within the EU, while on the other hand the German government has signaled that assistance from the IMF may be the answer. As far as the EU is concerned, Juncker summed it up suggesting that Greece should only expect EU help once it has gotten its own house in order. Looking ahead, Greece still needs to raise further cash, with the PM stating that Greece can not afford to pay spreads in excess of 300bps of German bonds. This is certainly making for an interesting lead-up to next week’s EU summit and is likely to cause further headwinds for the Euro. Elsewhere the Pound is trading weaker after the BoE’s Sentence warned that the risk of a double dip recession remains in the UK and that the country will need a “substantial” fiscal tightening, which can likely be offset by monetary policy remaining easy.

Data wise it has also bee n a fairly light overnight session with Japan’s all industry index coming in better than expected, with the previous number also revised marginally higher. Germany’s producer prices for February came in flat against expectations of a slight pick up, but with the overall European story, the data’s impact was muted.

Turning to North America, the only releases come in the form of Canadian CPI for February and January’s retail sales. On the inflation front, the number came in higher than expected at 0.4% (0.3% expected) with the BoC’s core number exceeding the BoC’s target of 2%, printing 2.1%. BMO Economics point out that “there is a big caveat to this number. The major special factor here was that travel services soared 17.9%, a figure that is simply off the charts and was due to the Olympics. The broader recreation, education and reading category alone accounted for more than 0.4 percentage points of the core CPI increase in the month. Assuming this gets reversed next month, core should back down substantially in March. That said, the also point out that “even looking beyond the special factor of travel costs due to the Olympics, core inflation remains surprisingly sticky in Canada, with neither the recession nor the resurgent Canadian dollar able to keep core prices down. While the Bank will not over-react to the persistent high-side surprises just yet, rate hikes are coming up fast on the near-term horizon, with or without the Fed in tow. We continue to expect the tightening cycle to begin in July, but can not completely rule out the Bank going ahead of that if core inflation does not back down soon.”

As for the C$, one thing worth noting is that back in late 2007 when USDCAD made its move to the mid 0.90 area much of the move was accompanied by large M&A flow which would have “skewed” the move, and likely lent a hand in the sudden move back higher. This time around there is no such extraneous factors which adds to our belief that this time there will not be such a quick snap back and that USDCAD may have entered a new trading range, possibly defined by 0.9750 – 1.0-250. Off the charts, the overall picture has not changed with the risks still skewed for a test of parity with the MACD still pointing lower although that view is still tempered slightly by a basing in the stochastics (which is similar to the charts of the past few sessions). The shorter term charts had signalled that the expected correction was nearly complete before resuming the trend lower, but with the big move in USDCAD on the back of the CPI, the short term charts are again moving into oversold territory. That said, any correction from here now looks to be of less magnitude than previously expected. Any move higher should be met with good selling interest from both corporate and investor types. To the topside, the 1.0225/50 area should provide good resistance with a move back above 1.0350 necessary to alleviate the overall downward bias. To the downside, 1.0070 should continue provide good initial support. As for the CAD crosses, The C$ should accelerate its outperformance.

Expected range: 1.0075 – 1.0160.
Jon Gencher

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