GBPUSD trades to new lows below 1.4350 in thin market. EURUSD dips below 1.3000 for first time in over a month.


MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q4 Consumer Prices fell -0.5% QoQ vs. -0.4% expected

  • Japan Tokyo Dec. Condominium Sales fell -18.2% YoY vs. -14.9% in Nov.

  • Japan Dec. Consumer Confidence fell to 26.2 vs. 27.2 expected and 28.4 in Nov.


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • UK Dec. CPI/RPI (0930)

  • Germany Jan. ZEW Survey (1000)

  • Canada Nov. Manufacturing Shipments (1330)

  • Canada Bank of Canada to Announce Interest Rate (1400)

  • UK BoE's King to Speak (2020)

  • New Zealand Nov. Retail Sales (2145)

  • US ABC Weekly Consumer Confidence (2200)

  • Australia Jan. Westpac Consumer Confidence (2330)

Market Comment:

The rally in risk appetite late last week has suddenly turned into a rout as the market can't seem to figure out what it wants to do. Interesting to see this sell-off in equities ahead of the most anticipated and hyped US presidential inauguration in history, with hope as the theme. It seems that rather than hope, the market is displaying a lot of nervousness and confusion. If we are to see this as a microcosm for future market moves, then rather than seeing a new trend after Obama takes the reins, the higher odds scenario may be a lot of back and forth vacillation and range trading while the market tries to draw a bead on the Obama effect in his first few months in office.

The situation with RBS and its likely announcement of a 2008 loss of GBP 28 billion saw the market selling GBP anew. It doesn't look as if market participants are investing much confidence in the UK government's new bank bailout plan, which seems to move inexorably towards an almost full nationalization. Another measure approved yesterday the UK government giving the Bank of England the right to buy private sector assets, similar to the types of dramatic measures the US Fed has taken in recent months. There seems to be a pattern here with these bank bailouts and central bank moves: First it was another round of tremors in the US banks recently with the big Citigroup and Bank of America stories - and now we are seeing echoes of the situation in the UK banks and follow up actions by the BoE. Who's next? Undoubtedly the mainland European banks, who will not escape a similar fate. The niggling question is again how the Euro framework deals with a bailout of the proportions we have already seen in the US and the UK.

The UK Telegraph's Ambrose Evans-Pritchard posted an excellent column over the weekend about the stresses on the framework and its depressionary effects on the weaker EuroZone states. As well, yesterday, he discussed an economist's warning that Ireland should threaten to leave the euro if it doesn't receive aid from stronger EuroZone members. These are highly relevant and pressing issues and we reiterate our view that any premium achieved by the Euro these days is likely mostly due to its liquidity. We are looking for further weakness in the single currency this year. With the idea that European banks are the next in the firing line, it would seem that the scope for further EURGBP gains from here are rather limited. GBPUSD, meanwhile, traded below the previous 1.4350 low overnight, which makes us roll back the chart until we find the last time we traded these levels in early 2002. The 23-year low for the pair was a spike below 1.3700 back in the summer of 2001.

The Bank of Canada meeting is up today, and baseline expectations are for another cut of 50 basis points to bring the rate to 1.00%. USDCAD has traded higher in sympathy with the general USD rally going into the meeting. The guidance from the BoC may be less important than the general risk appetite in the market, but we should watch for any language that suggests the bank is making plans for quantitative easing types of strategies if it feels that lowering the interest rate further is going to provide insufficient impetus for banks to increase their lending. The World Economic Forum said that Canadian banks were the world's soundest, so the situation in the financial sector in Canada is not as dire as in the US and the UK. But the Canadian economy is tightly bound with the US economy and could have a lot of further catching up to do to the downside. Eventually, it seems the pair should be working its way back toward 1.3000 and then some.

Chart: USDCAD

USDCAD has spent most of the last three months in the 1.2000 to 1.3000 range. It looks like a rally is building here for another try at the far side of 1.3000 in the days ahead. Watch out for the rate decision and guidance from the Bank of Canada today.

USDCAD