GLOBAL FX STRATEGY | DAILY FX UPDATE

Tuesday, March 7, 2017

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USD MIXED; SPREADS SUPPORTIVE; AUD UP ON RBA
Shaun Osborne
USD mixed vs. G10, up vs. G4; this weeks employment data key for Fed path.
Chief FX Strategist
CAD steady, vulnerable into 8:30am ET trade data; bearish (bullish USDCAD). 416.945.4538
shaun.osborne@scotiabank.com
EUR still trading rich to spreads with fair value closer to 1.02; bearish.
Eric Theoret, CFA, CMT
GBP underperforming; Article 50 trigger timeline expected unch; bearish. FX Strategist
416.863.7030
JPY steady as broader tone provides offset to spreads; neutral-bullish.
eric.theoret@scotiabank.com
AUD pops on RBA; low inflation and employment still the focus; bearish.
CNY & CNH steady just above recent lows; near-term risk in trade data.
EURBEARISH AS SPREAD WIDENS FURTHER
FX Market Update - The USD is trading in mixed fashion on the day so far. The
AUD is well supported after the RBA left policy unchanged but USD gains against
the GBP, EUR and JPY are keeping the DXY measure slightly positive on the
session so far. Global stocks have not shaken off the offered tone that was evident at
the start of the week, prompting a bid for fixed income where major European
markets are out-performing somewhat; the result is a renewed widening in spreads
in the USDs favour at the short end of the curve, with the USD enjoying a
substantially supportive 220bps yield premium over the EUR (top chart) and 124bps
over the GBP at the 2-year sector of the curve. Both yield gaps equate to fresh, multi
-year highs. We remain bullish on the outlook for the USD; a March rate increase in
the Fed funds target rate is all but fully factored into the markets at this point but we
think that firm US labour market data this week (ADP tomorrow and NFP on Friday
Source: Bloomberg & Scotiabank FX Strategy
especially) will support the USDs bid tone ahead of the FOMC next week where the
Fed will provide an update on the economic outlook and some insight into the
expected flight path for rates over the balance of this year and beyond. At the very
USDCADNO MAJOR RESIS. AHEAD OF 1.36
least, we think the Fed will raise two more time but an earlier than expected move to
tighten this year could still well open the door to the Fed doing more. Commodities
remain somewhat mixed, with metals prices mostly lower and crude oil prices a little
firmer, though still within the well-established range; WTI is flirting with its 50-day MA
(top chart) and price action last week looked soft, suggesting some building
downside risks for crude. Chinese data showed FX reserves growing modestly in
Feb, the first rise in seven months allowing total reserves to regain the USD3tn mark.
Trade and investment data may be released tonight. The yuan is little changed
versus the USD and modestly weaker against its basket. Finance officials continue to
stress CNY stability at the National Peoples Congress. S.O.

USDCAD (1.3411) CAD is quiet, consolidating in a tight range just above Mondays
close and last Fridays low ahead of a key pair of trade releases at 8:30am ET. Source: Bloomberg & Scotiabank FX Strategy
Relative central bank policy remains bearish for CAD in an environment of Fed
tightening against a neutral-dovish tone from the Bank of Canada. Last weeks BoC GBPLOOK TO RETEST OF 1.20 AREA
statement highlighted ongoing competitiveness challenges for exports, thus
elevating the risk surrounding Tuesdays trade data for January. Details on non-
energy exports will be heavily scrutinized. Interest rate differentials are wide, and the
2Y U.S.-Canada yield spread is pushing toward 55bpts. We hold a bullish USDCAD
(bearish CAD) forecast with a Q2 target of 1.40. E.T.

USDCAD short-term technicals: bullishsignals are broadly bullish across both

trend and momentum indicators. Near-term congestion has emerged around 1.34
however we continue to highlight the absence of significant resistance ahead of the
late December high near 1.36 (middle chart). Support is expected between 1.3380
and 1.3350. E.T.
Source: Bloomberg & Scotiabank FX Strategy

EURUSD (1.0571) German factory orders plunged 7.4% in January versus an

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 GLOBAL FX STRATEGY | DAILY FX UPDATE
Tuesday, March 7, 2017

expected 2.5% drop. Polling in the French presidential election suggested a tightening in the race, with Macron ahead of Le Pen in first
round voting. Dutch polling also suggests some weakening in support for the (anti-EU) Freedom Party. Wide short-term spreads
remain the primary impediment against a EUR rebound, we think, and might suggest the EUR should be trading a fair bit lower still. We
rather think spot looks quite rich relative to where spreads suggest it might or should be trading, based on recent relationships (top
chart). Our fair value model (using spreads and relative equity returns as inputs) suggests an equilibrium spot value of 1.0204. S.O.

EURUSD short-term technicals: bearish Soft price action in earlier European trading has left a bit of a dent in the short-term
technical picture for EURUSD, even though spot has firmed a little from the low print around 1.0560. A fourth, and strong, rejection of
the 1.06+ level yesterday should keep the broader technical undertone negative and strengthen near-term resistance above the 1.06
area (55-day MA just above). Look to fade short-term gains to the 1.06 area. We target a retest of the 1.05 zone shortly. S.O.

GBPUSD (1.2197) Sterling is under-performing. UK house price growth slowed in Feb, raising concerns that the economy may be
losing momentum just as the UK government starts Brexit negotiations. The House of Commons is set to review (and likely reject) the
proposed changes to the simple Brexit bill made by the upper house last week. We do not think the debate will necessarily affect the
exit timetable significantly and anticipate PM May announcing a formal exit by the end of the month. Note Chancellor Hammond
announces the budget statement Wednesday. S.O.

GBPUSD short-term technicals: bearish Cable looks weak on the charts and we expect more losses in the near-term at least.
Trend momentum signals are aligning bearishly for the GBP on the shorter-term studies and loss of support at 1.2215 yesterday
suggests that the downdraft that started in late Feb is poised to extend. Support stands at 1.2156 (76.4% Fib retracement of the Jan/
Feb pop higher) but we rather expect a retest (at least) of the 1.20 area in the next few weeks (bottom chart). Sell minor GBP rallies.
S.O.

USDJPY (113.97) JPY is quiet, consolidating for a second consecutive session with impressive resilience in the face of widening
interest rate differentials and low FX market volatility. Broader concerns remain key, underscoring JPYs risk profile and vulnerability to
gains in periods of broader uncertainty. The 2Y U.S.-Japan yield spread is wide, around 160bpts at levels last seen in 2008, and
domestic risk is elevated ahead of the 6:50pm ET release of trade and current account data. E.T.

USDJPY short-term technicals: neutral-bearishthe one month range has yet to be broken with USDJPY roughly bound between
the mid-111s and 115. Near-term resistance appears to have emerged around the 50 day MA (114.17) and shorter-term (hourly) charts
are suggestive of a decisively bearish turn. E.T.

TECHNICALS: BUY/SELL SIGNALS AND PIVOT LEVELS Mar 07, 2017

30 Day 9 & 21- Pivot 1st Pivot 1st
Spot MACD DMI RSI
Hist Vol day MA Support Resist.
USDCAD 5.9 1.3410 buy buy buy 68 1.3375 1.3435
EURUSD 7.1 1.0572 sell sell sell 46 1.0540 1.0622
GBPUSD 7.4 1.2198 sell sell sell 35 1.2154 1.2272
USDCHF 6.4 1.0147 buy buy buy 59 1.0095 1.0177
USDJPY 9.6 113.96 buy buy buy 53 113.63 114.21
AUDUSD 7.3 0.7596 sell sell sell 47 0.7567 0.7629
USDMXN 14.5 19.5214 sell sell sell 35 19.42 19.64
DXY (USD index) 5.6 101.79 buy na buy 59 101.38 102.04
EURCAD 7.1 1.4176 buy buy buy 61 1.4143 1.4225
GBPCAD 8.2 1.6357 buy buy sell 48 1.6304 1.6439
AUDCAD 7.0 1.0186 buy buy buy 61 1.0140 1.0225
CADMXN 15.0 14.56 sell sell sell 27 14.49 14.64
BoC Noon Rate 1.3410 Source: Scotiabank & Bloomberg

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 GLOBAL FX STRATEGY | DAILY FX UPDATE
Tuesday, March 7, 2017

TODAY'S CALENDAR
Time Country Release Period Consensus Last Significance
08:30 US Trade Balance Jan -$48.5b -$44.3b HIGH
08:30 CA Int'l Merchandise Trade Jan 0.75b 0.92b HIGH
10:00 CA Ivey Purchasing Managers Index SA Feb 58.5 57.2 Low
15:00 US Consumer Credit Jan $17.750b $14.160b Low
18:50 JN Trade Balance BoP Basis Jan -800.2b 806.8b Med-High
18:50 JN GDP SA QoQ 4Q F 0.40% 0.20% HIGH
18:50 JN GDP Annualized SA QoQ 4Q F 1.50% 1.00% HIGH
03/18 CH Foreign Direct Investment YoY CNY Feb -4.20% -9.20% Med-High
03/08 CH Imports YoY Feb 20.00% 16.70% HIGH
03/08 CH Exports YoY Feb 14.00% 7.90% HIGH
03/08 CH Trade Balance Feb $27.00b $51.35b HIGH

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