High Yielders Continue to Win Out on Improved Sentiment (Morning Slices)

MORNING SLICES

Fundys – There were no significant developments overnight, with the market continuing to trade off of the broader global macro fundamentals of improved sentiment and increased risk appetite. The more upbeat psychology has resulted in additional buying of higher yielding currencies, with traders once again focused on favorable interest rate differentials. The New Zealand Dollar has been a star performer of late as a result, and once again leads all currencies on the day, up some 1.50%. The Australian Dollar has however been somewhat of a laggard, with the antipodean weighed down on fears of a potential rate cut at Tuesday’s meeting. Calls from AFR Mitchell for a 50bp cut on Tuesday, have been sourced as a primary driver for the relative weakness in Aussie. The Swissy has also been a relative underperformer on the crosses with Friday’s much lower than expected inflation data escalating fears over the threat of deflation. ECB Bini Smaghi was on the wires overnight touting the Euro as “the best exchange rate decision Europe has ever taken.” Meanwhile ECB’s Quaden and Bonello made it quite clear that the central bank was not yet done with accommodation and would consider all options going forward. In Japan, traders began to focus on the expected unveiling of the new stimulus package. The government is now expected to approve another USD100B on top of the USD119B already in circulation. Usd/Jpy has been very strong on the day with the market bolstered on heavy cross related yen offers. On the data front, Eurozone investor confidence was better than expected while annualized PPI data came in much softer to put in the biggest drop since April, 1999. Eurozone retail sales was also concerning after the data series showed a much weaker than expected annualized print. Looking ahead to the North American session key event risk comes in the form of Canada building permits (-3.0% expected) and Ivey PMI (45.4 expected) due at 12:30GMT and 14:00GMT respectively. On the official circuit, Fed Warsh is slated to speak at 17:00GMT on the financial markets in Washington.

Techs - EUR/USD continues to extend gains into Monday with the market now focusing on the 78.6% fib retrace off of the 1.3740-1.3115 move by 1.3600. A break above the 78.6% fib should open a direct retest of 1.3740 while back below 1.3365 will put the pressure back on the downside. USD/JPY (See below). GBP/USD gains have stalled out just shy of the key 1.4990 early February highs. Look for this level to be tested and broken over the coming session with only a break back below 1.4650 to delay the short-term bullish price action. Ultimately any gains are not seen extending much beyond 1.5070 on Monday. USD/CHF dips have found some support intraday by the 200-Day SMA which continues to prop the major on dips. The market has been unable to establish a close below the 200-Day, and we would expect the moving average to once again support. Ultimately only below 1.1165 will shift outlook. A break back above 1.1395 is now required to accelerate to the upside.

Flows – Semi-officials on the offer in Euro. Asian accounts and tech related sell interest in Aussie above 0.7200; option expiries at 0.7150. Hedge fund buying Cable; US investment house and French bank selling. Japanese investment names on the bid in Usd/Jpy; commercial accounts selling.

Trade of the Day – Usd/Jpy: The pair is looking stretched intraday with the market having already exceeded its daily “average true range” (ATR) of 175 pips, to trade up well over 200 pips thus far. While we see scope for additional upside over the coming days, with shorter-term studies so stretched, we look for an opportunity to establish a playable counter-trend short on Monday if given the chance. The next key level to watch above comes in by 101.70 which represents the 61.8% fib retrace off of the major 110.70-87.15 move (Aug08-Jan09). As such we will sell on a rally to 101.70 today in anticipation of a major corrective pullback from there. Strategy: SELL @101.70 FOR A 99.35 OBJECTIVE, STOP @102.70. Stops to be trailed to cost on a break back below 101.20. If trade triggers and 101.20 not broken, position to be closed out at NY close (5pm ET) on Monday. Recommendation to be removed if not triggered by NY close on Monday.