Saxo Bank

High yielders make strong comeback on equity and commodity rallies.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• Australia's Nov. Leading Index out at 0.8% vs. 0.9% expected.
• Japan Tokyo Jan. CPI out at 0.2% vs. 0.3% expected.
• Japan Dec. National CPI out at 0.7% YoY as expected, and core CPI out at -0.1% as expected.

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• France Jan. Business Confidence Indicator (0745)
• Sweden Dec. Trade Balance (0830)
• Switzerland's Roth to Speak (1105)
• Canada Dec. CPI (1200)

Market Comments

An interesting new twist to the situation yesterday with the breaking of the SocGen rogue trader news. The market is wondering: to what degree was the equity sell-off exacerbated by this character's wildly irresponsible positions? And to what degree did the stock market swoon affect the Fed's dramatic 75 bp cut? Now the poor Fed is under the glare of the 20-20 hindsight lamps as articles (especially from the redoubtable Mr. Ip over at the WSJ) lambaste Bernanke for being too quick to pull the trigger due to stock market drops. To be fair to Mr. B, we have to recall analysts from leading banks on CNBC screaming for 100 bps - and NOW, please. He certainly appears to sit in the world's hottest seat at the moment (the seat formerly occupied by the ill-fated SocGen trader, I suppose.) No doubt the size of this trader's positions, at €50-70 billion, certainly aggravated the sell-off to some degree, but now the psychology of "oh it wasn't as bad as it looked" is reinforcing the strength of the bounce. It may take a few days to get an "honest" reading on things in this kind of environment. And it will be very interesting to see what the Fed does on the 30th of this month if stock markets are still in rally mode. The short term interest rate markets are unwinding some of the Fed easing predictions for the next meeting and many are beginning to place bets that the Fed will only cut 25 bps.

So what does this mean for foreign exchange markets? It seems the only thing we can do here is place risk appetite trades as almost all currency pair combinations seem to move in correlation with this theme and with each other (EURSEK down, GBPJPY up, USDCAD down, AUDCHF up - it's all the same thing at the moment) and all asset markets appear to be fully in lockstep. We must stay tuned and watch for the next inflection point that will give us a clue. The risk rally has built up a lot of momentum at the moment, and we can try to follow that momentum for the short term with a day trade with tight stops (perhaps selling USDCAD on rallies ahead of the CPI, looking for a try at parity), and/or we can try to lean back and look at the longer term perspective and buy an option or two to make a bet that this risk appetite will fade - as our little SocGen trader did not change the global macroeconomic environment.

The NZD was reluctant to follow its fellow high-yielders higher after Alan Bollard, the RBNZ governor was out with his usual complaint that the currency is overvalued. On inflation, he commented that the RBNZ is "on top" of things and "our view is that the outlook is flattish at the moment., we can't be sure where things will go in the future" (Now that's a nice, non-commital way of putting it...) On rates, he stated that risks are "roughly balanced" and that he "didn't see any change." On the currency, he said that is was "broadly overvalued." Bollard also downplayed New Zealand's exposure to the US market. We watch NZDUSD for a change in direction back lower again...

The ECB's Weber was out with the "rates still accommodative" rhetoric yesterday, but this didn't seem to particularly move the market, as he is apparently already known as a died-in-the wool hawk and the risk appetite theme was more interested in the high yielders anyway. EURUSD crossed above it's 55-day SMA again yesterday, and final Fibo resistance lies at 1.4786, though the really big resistance still looms up at 1.5000.

Chart: GBPUSD

GBPUSD reached an interesting technical inflection point overnight at 1.9804, the 0.618 Fibo retracement for the move from the last rally top at 2.0100 to the recent low at 1.9338. As of this writing, it is breaking higher through this level and through the flatline resistance level created by the recent high at 1.9790. If this holds into the European session, the next focus may shift to 2.0034, the first Fibo for the move all the way from the 2.1160 top. Note that this could converge with the 55-day SMA and become an interesting test for the overall downtrend if we do in fact see an extension of the rally here. To reinforce: we're still bearish on the pair in the bigger picture, just trying to gauge where the rally may face a key test in the shorter term...