2. 2 www.econotimes.com
Market Recap
● Global stocks mostly inched lower as oil extended
losses following a 6-percent plunge, driven by data
showing a manufacturing slowdown in the world's
two largest economies.
● Europe started lower, with Britain's FTSE 100
down 1.2pct to 5,985.97. Germany's DAX dropped
1pct to 9,656.78 while France's CAC 40 slipped 1.4
percent to 4,331.20. Dow futures fell 0.7pct and
S&P 500 futures declined 0.8 percent.
● Japan's Nikkei ended down 0.6 percent as inves-
tors locked in profits after two straight days of big
gains following the Bank of Japan's decision.
MSCI's broadest index of Asia-Pacific shares out-
side Japan lost 1.2 percent. China's CSI300 Index
ended up 2.1 percent at 2,961.33 points, Shanghai
Composite Index closed up 2.3 percent at 2,749.57
points.
● Oil prices dropped on demand outlook and rising
supply worries, and the hopes for a deal between
OPEC and Russia on output cuts faded. Brent for
April delivery dropped 53 cents to $33.71 a barrel
by 0910 GMT, after settling down $1.75, or 4.9
percent, in the previous session. The front -month
contract for West Texas Intermediate was down 61
cents at $31.01 after falling $2.00, or 5.9 percent,
in the previous session.
● Gold rose to a 3-month high as weak global manu-
facturing activity pushed investors towards safe-
haven assets. Spot gold reached $1,130.11 per
ounce, its strongest since Nov. 3, and was trading
down 0.3 percent at $1,125.36 by 0634 GMT. U.S.
gold for April delivery was off 0.2 percent at
$1,126 an ounce.
Treasuries
● U.S. 10-year Treasury yield last stood at 1.9225,
down 0.043 pct.
● UK March Gilts pushed slightly higher at 120.19.
January Markit/CIPS Construction PMI came in at
55.0. The market was looking for another robust
expansive reading of 57.5 (previous 57.8) as com-
mercial building underpins the sector.
● JGB prices remained weaker, with the 5s/30s
curve steepening by 4.5bp from yesterday. Super -
long JGBs extended their earlier losses modestly,
as the BoJ is not expected to buy super-long JGBs
tomorrow under its massive JGB purchase program.
The results of today's monthly 10-yr JGB auction
were moderately weaker than widely expected due
to the strong pre-auction rally for the last two ses-
sions. Yields on current 2-yr JGBs were up 1.5bp at
-0.145%, vs -0.15% earlier, while the 5s were up
1bp at -0.10%, the lead 10-yr March JGB futures
dropped 0.15 percent at 150.41, after moving in a
150.37-150.61 range.
● Euro zone bond yields fell as oil prices dropped
and ECB's Chief Draghi confirmed his commitment
to review monetary policy in the bloc next month.
German 10-year bond yields fell 2 bps to 0.34 per-
cent, recovering from a late surge on Monday to
move back towards a 9-month low of 0.24 percent.
All other euro area equivalents were lower between
1 bps and 3 bps.
● Australian government bond futures were a touch
lower, with the three-year bond contract off 1 tick
at 98.130. The 10-year contract lost half a tick to
97.3750, while the 20-year contract shed 1 tick at
96.8600. New Zealand government bonds gained,
sending yields between 0.5 and 3 bps lower.
Market Briefs
● EUR/USD bid but holds familiar range
1.0883/1.0920 today.
● GBP/USD gives back Mon's gain. 1.4436 to 1.4389
but regains 1.44 ahead of NY.
● USD/JPY drops to 120.35 overnight but lifts to
120.80 in Europe.
● Brent down almost 4% on day to $32.79/barrel.
$36.25 was Monday's peak.
● Fitch: Russia maintains oil price response, at a
cost to growth.
● Russian ForMin: Open to further cooperation to
hold meeting on oil if everyone wants.
● EZ Dec Producer Prices -0.8% m/m, -3.0% y/y vs
previous -0.2%/-3.2%. -0.6%/-2.8% expected.
● EZ January Unemployment Rate 10.4% vs previous
10.5%. 10.5% expected.
● UK January Markit/CIPS Construction PMI 55.0 vs
previous 57.8. 57.5 expected.
● Swiss Dec Retail Sales -1.6% y/y vs previous -
1.7% revised.
● SNB Jordan: CHF remains overvalued, 7-8 percent
against the euro
Institutional Positions
● J.P. Morgan: Buy a 6-mo GBP/USD 1.40-1.33 put spread,
P/L 0.23%.
● J.P. Morgan: Buy a 2-month USD/CAD 1.43 call, RKO
1.50.
● J.P. Morgan: Short NZD/USD, GBP/SEK, USD/PLN, EUR/
NOK and PLN/HUF.
● J.P. Morgan: Stay long USD/SGD, USD/TWD and AUD/
NZD.
● J.P. Morgan: Stay short EUR vs SEK (covered put) and CZK.
● Societe Generale: Buy EUR/CHF 3m call strike 1.1460, sell
3m put strike 1.06.
3. Economic Data Preview
● (0855 ET/1355 G MT) U.S. Redbook Index for the
week ending January 29.
● (0945 ET/1445 GMT) NAPM-New York releases
ISM New York Index and Business Conditions In-
dex for January.
● (1000 ET/1500 GMT) The IBD's Economic Opti-
mism Index is likely to have risen to 47.8 in Febru-
ary from 47.3 in January.
● (1030 ET/1530 GMT) The financial firm Markit
releases the Mexico's Manufacturing PMI for Janu-
ary, the index stood at 52.4 in December.
● (1330 ET/1830 GMT) The total vehicle sales in U.S.
likely increased to 17.4 mln in January from 17.37
mln in December. Domestic car sales are expected
to stay at 5.5 mln and truck sales probably slipped
to 8.2 mln from 8.34 mln.
● (1630 ET/2130 GMT) API Weekly Crude Oil Stock,
previous 11.4M.
Key Events
● (1300 ET/1800 GMT) Fed's George Speech.
● (1045 ET/1545 GMT) FedTrade Operation 30-Year
Fannie Mae / Freddie Mac (max $1.625 bn).
Top News
● Prices at factory gates in the 19 countries sharing
the euro fell by more than anticipated in December,
in another sign of the challenges facing the ECB in
bringing inflation nearer to its medium-term target.
Producer prices fell by 0.8pct in December, com-
pared with the previous month and by 3.0 percent
compared to the same period a year ago, the EU’s
statistics office Eurostat said on Tuesday.
● German unemployment fell more sharply than ex-
pected in January and the jobless rate dropped to a
record low, suggesting private consumption will
help offset a slowdown in emerging markets to
keep growth in Europe's largest economy steady.
The number of people out of work fell by 20,000
on a seasonally adjusted basis to 2.732 million, the
Federal Labour Office said. The seasonally adjusted
jobless rate declined to 6.2pct from 6.3pct in De-
cember, hitting the lowest level since reunification
in 1990.
● Growth in Britain's construction industry was its
weakest in 9 months in January after a short-lived
recovery in December, a survey published on Tues-
day showed. The Markit/CIPS UK Construction
Purchasing Managers' Index fell to 55.0 from 57.8,
below the median forecast of 57.5 in a Reuters poll
of economists.
● After one year of secret diplomacy and hushed-up
private talks globally, OPEC's mighty Saudi Arabia
and rival Venezuela were persuaded to cut a deal
by non-OPEC Mexico which overcame mutual acri-
mony and led to a much-needed rise in oil prices.
● Greece's international lenders began reviewing on
Monday its progress in implementing reforms set
out in a multi-billion euro bailout deal to assess
whether it has done enough to secure debt relief in
future. Greece is facing challenges on many fronts
as it struggles to win public approval to overhaul
the pension system and cut more costs while its EU
peers urge it to tighten controls on the flow of mi-
grants passing through on their way to northern
Europe.
● China said on Tuesday it will reduce the minimum
down payment required for first- and second-time
home buyers in most cities, a move aimed at clear-
ing a housing glut in regions outside the country's
major centers. The central bank and banking regu-
lator jointly announced they would lower minimum
down payments for first-time home buyers to as
low as 20pct, from the current 25pct, in cities that
do not have restrictions on purchases. The main
cities that have such restrictions include Beijing,
Shanghai, Guangzhou and Shenzhen.
● Japan might follow its own advice to China, by
implementing capital controls. What is now essen-
tially a currency war in which China, Japan and
others fight over the limited supply of external de-
mand may eventually cause dislocations that make
highly unorthodox steps like capital controls palat-
able.
● India's central bank kept its policy rate on hold at
6.75 percent on Tuesday, as widely expected, opt-
ing to wait until after the government's annual
budget statement at the end February to decide on
whether to cut interest rates further.
3 www.econotimes.com
4. 4 www.econotimes.com
FundamentalAnalysis
Worst has passed for CAD, dips are a buying opportunity
The loonie lost over 15% of its value versus the U.S. dollar,
Japanese Yen and British pound in the previous year. The sell
-off in the CAD was looking extended from a quantitative, as
well as qualitative perspective. The Canadian dollar is not
seen this cheap since 2004. The biggest problem for Canada
has and will continue to be oil. However, unchanged Bank of
Canada monetary policy settings, reiterated BoC Governor
Poloz's believes that stronger U.S. growth, a weaker Cana-
dian dollar and rate cuts delivered in the first half of 2015 will
help the economy recover and avoid the need for unconven-
tional policies such as quantitative easing. The central bank is
now waiting to see if fiscal policy would pick up the baton to
try and drive the economy forward. The central bank's confi-
dence as well as steadier crude oil prices have helped stabi-
lize the CAD.
The ongoing discussion since mid last week about coordinated
production cuts by Russia and OPEC saw oil prices stabilizing.
We have also seen a bounce in Canadian interest rates (as
market conviction regarding BoC easing risks fell) and a drop
in US interest rates (as investors debate the pace of Fed tight-
ening amid renewed equity market volatility). Better data and
narrower rate spreads (the 2-year bond yield differential nar-
rowed around 20 bps from the early January peak to around
40 bps) provided the fundamental foundation for a rebound in
the CAD.
The risk is clearly geared towards more CAD weakness, USD/
CAD is likely to strengthen significantly in the early stages of
the calendar year. 1.42/1.45 levels for USD/CAD should not
be a surprise before the end of Q1 before some consolidation
sets in through Q2/Q3. The USD rally extended through late
January, reaching a peak just under 1.47 (near 68 cents US) as
oil prices remained under pressure. The USD/CAD rally
through January took the USD to a little more than 30%
above its 10-year moving average. From a qualitative perspec-
tive, relative data surprises started to shift against the USD
through January as Canadian data surpassed projections
(international trade, jobs, whole sale trade, manufacturing
sales, for example).
"We remain reluctant to alter our view, implying that the CAD will
steady through Q1. We think markets will remain volatile, how-
ever, and do not exclude the risk of the USD retesting levels near
the recent highs against the CAD in the next few weeks. We
rather think the worst has passed for the CAD, however, and that
near-term losses are a buying opportunity", notes Scotiabank in a
research report.
The Canadian dollar improved for a third straight week, as
USD/CAD dropped over 600 pips from 1.4690 on Jan 20th to
currently trade around 1.40 levels as of 1115 GMT.
5. 5 www.econotimes.com
Economy Watch
● Thailand plans 2017 budget deficit of 390 bln baht – Minister.
● India’s real GDP will likely expand by 7.6% y/y this year, up slightly from the estimated expansion of 7.3% in 2015 – Scotia-
bank.
● India's inflation will decelerate slightly over the next few months before re-approaching the 6% y/y mark by the end of 2016
- Scotiabank.
● India cbank projects economic growth at 7.6 pct for 2016/17 fiscal year and 7.4 pct with downward bias for 2015/16.
● India cenbank says will adjust inflation forecast path as and when clarity emerges on pay commission implementation.
● Turkey aims to increase trade with Iran from $14 bln in 2015 to $30 bln by 2023 - Economy minister.
● Interview-Turkey's economy minister says aims to boost trade with Latin America from over $8 bln to $20 bln by 2023.
● U.S. economy on track to grow 1.2 pct in first quarter 2016 - Atlanta Fed's Gdpnow model.
● The Brazilian economy will contract by 3% this year before stating a modest recovery in 2017- Scotiabank.
● Brazil's 2017 GDP growth forecast 0.70 pct vs 0.80 pct previous week - Weekly central bank survey.
● Brazil's 2016 GDP growth forecast -3.01 pct vs -3.00 pct previous week - Weekly central bank survey.
● Brazil's 2017 inflation forecast 5.80 pct vs 5.65 pct previous week - Weekly central bank survey.
● Brazil's 2016 inflation forecast 7.26 pct vs 7.23 pct previous week - Weekly central bank survey.
● Botswana finmin Matambo says budget deficit of 3.2 pct of GDP expected in 2016/17.
Policy Watch
● The RBA will more likely begin to remove some policy accommodation in H1-17- BoFA Merrill Lynch.
● The pressure by Indian government for additional stimulus may prompt the RBI to lower the policy rate further to 6.50% in
the first quarter of this year- Scotiabank.
● Barclays: Riksbank rate cut to be accompanied by modest downward revisions in the CPIF inflation profile.
● Barclays: The ECB to cut its deposit rate by 10bp at its march meeting, to -0.4%, and believe further easing may be neces-
sary, given the recent tightening in euro area financial conditions and very low inflation expectations.
● Barclays: The US non-farm payrolls report should pave the way for the FOMC to hike rates at the March meeting, and pro-
vide further support for the USD.
● Brazil's 2017 year-end Selic rate forecast 12.75 pct vs 12.75 pct previous week - Weekly central bank survey.
● Brazil's 2016 year-end Selic rate forecast 14.25 pct vs 14.64 pct previous week - Weekly central bank survey.
Trade Views
● Bank of America-Merrill Lynch analysts call for G20 to agree one-off devaluation of yuan at Feb 26-27 meetings -research
note.
● China’s economy may start to stabilize from mid-2016 on account of stimulus efforts, the CNY may reverse some losses-
Scotiabank.
● Scotiabank: USD/INR may trade in a range of 67.0-68.5 in February.
● Scotiabank: USD/RUB is forecast to end 2016 at 69.0.
● Barclays: Price action in AUD and NZD is likely to be driven mainly by global risk sentiment and commodity prices.
● Barclays: The upward pressure on USD/JPY is likely to continue in the near term in the wake of the BOJ’s negative rates
and the ongoing recovery in global risk assets.
● Barclays: The BoE’s February inflation report and associated minutes (Thursday) are likely to place additional downward
pressure on GBP this week.
● Barclays: With the market pricing in only a 15-20% probability of a Fed rate hike in March and less than a 25bp hike for the
full year, reactions of the USD to payrolls outcomes will likely be asymmetric.
7. 7 www.econotimes.com
Hedging Perspectives
Aussie dollar likely to continue its bear run after RBA stands pat, AUD/USD gamma calendar combinations for hedging
As anticipated, the RBA board meeting for interest rate decision, has not bring in any change, that the board has decided to
hold the cash rate steady at 2.0%. With the market probability of a move near to zero, that is a sharp contrast to some months
ago when markets gave a 100% probability to a rate cut by February.
Prevailing implied volatility rates for AUD/USD ATM contracts of 1M expiries is almost close to 13% while risk reversals are
also highest negative flashes among G20 currency space. Thus, on a long term hedging perspective, debit gamma put spreads
are advocated so as to reduce the sensitivity and focus on hedging motive.
25-delta risk of reversals of AUD/USD the most expensive pair to be hedged for downside risks as it indicates puts have been
overpriced. As the risk appetite varies from different investors to different traders, we’ve customized our formulation of
strategies for such varied circumstances.
AUD/USD is currently the best realizing dollar vol anywhere in G20 or EM, and also proved one of the better gamma buys of
2015, thanks to an outsized 12% decline in the currency. If we are correct in projecting next year’s spot trough 6% below cur-
rent market, AUD should once again prove its mettle as a solid vol hold due to its unique status as a high-beta currency that
sits in the eye of Fed and EM/China whirlpools.
At current spot FX ticking at 0.7071, Selling 1W at the money call option is recommended to reduce the cost of hedging by
financing long position in buying 1M out of the money gamma put options as the selling indications are piling up on daily and
weekly graphs. So, buy 1M (-0.5%) out of the money 0.11 gamma put option and short 1W (1%) out of the money call option.
In the instance that we described above, let’s suppose in 1-week time AUD/USD moves to 0.7025 – 0.7000 levels (i.e 70 pips
around 1%) put instrument becomes in the money and its Delta increased from -0.5 to 0.45, Gamma is responsible for this
change. Gamma controls the Delta. It is the mathematical formulae software) that decides the change in Delta based on a 1-
point change in the underlying value.
9. 9 www.econotimes.com
Technical Analysis
USD/CAD faces strong resistance around 1.4070, good to sell on rallies
Major resistance -1.4070 (trend line joining 1.4174 and 1.4108)
● Loonie recovered after making a low of 1.39040. It is currently trading around 1.40320.
● Short term trend is still weak as long as resistance 1.4070 holds. Any break above 1.4070 will drag the pair to next level
1.4100/1.4150 level.
● On the lower side major support is around 1.3985 and break below targets 1.3960/1.3900/1.3880.
It is good to sell on rallies around 1.4040 with SL around 1.4080 for the TPof 1.3980/1.3960
10. 10 www.econotimes.com
Trade Idea
We prefer to short GBP/CAD on rallies
Candlestick Pattern- Shooting star
Major trend line resistance -2.01850 (trend line joining 2.0369 and 2.02779)
● The pair has made a high of 2.01844 and started to decline from that level. It is currently trading around 2.01365.
● Any break above 2.0185 will take the pair till 2.0226/2.0278.
● On the lower side major support is around 2.0100 and break below will drag the pair down till 2/1.9870.
It is good to sell on rallies around 2.0150 with SL around 2.0200 for the TPof 2.07/2/1.9870
RESISTANCELEVELS SUPPORT LEVELS
R1-2.0185 S1-2.0100
R2-2.0225 S2-2.0000
R3-2.0278 S3-1.9870