Today FX Comment

August 22, 2022

Good morning. I think the best way to put it is risk sentiment is treading water today. However, energy concerns in Europe remain at the forefront, there are reports that Russia is preparing to ramp up attacks ahead of Ukraine's Independence Day and of course we have the Saudi oil minister talking about production cuts to prop up crude prices. I would have to say the risk backdrop is precarious to say the least and sentiment could sour at any moment.?

After a weak hand off from North America, Asian equities were mostly lower overnight. China's indices fared better than most, likely on the back of reports that suggest the PBOC could be considering another cut to their RRR, which in turn could see loan prime rates lowered once again. As we have noted before, it sure does look like China will be providing more fiscal and monetary stimulus as they head toward the Communist party congress last this year, they have to prop that economy up as best they can and make Xi look good.?

Europe still faces a myriad of problems and by now we are familiar with them, war in Ukraine, ongoing energy concerns, the threat of Russia shutting off the gas taps and stagflation. The story isn't pretty but the pressure has let up a little bit this morning as EU PMI data was not as poor as the market had feared. Power prices have softened a touch as well with reports that Germany will be firing up more coal powered plants to supply electricity (probably not the best for the environment but there are clearly desperate times). Futures point to a flattish open in North America while oil trades higher once again as it looks like the Saudis have put a floor (short term at least) in the price of crude with their supply cut threats. ?

We know the market is already looking toward Friday and Jerome Powell's speech but in my opinion I don't think he will deviate all that much from what every other Fed member has been saying. Inflation is heading in the right direction but the fight is not done and rates will need to go higher. Of course he could hint that 50bp rather than 75 bp hikes may be more appropriate going forward and the market might be soothed by that. At some point the Fed will have to dial it back just a touch to better gauge the impact of the tightening they have done thus far. If China is slowing and Europe's economy is under severe pressure perhaps the odds of the Fed overdoing it are increasing rapidly??

?FX thoughts:?

AUD - Australian PMI data was a touch softer than expected overnight but the numbers were mostly ignored by the market as the Oz is little changed to start the session. More importantly, unemployment is low, inflation is running hot and wages are slowly rising. Ultimately the RBA will have to become more aggressive. Support right here at .6870.?

JPY - To borrow the title of a Led Zeppelin concert film, the song remains the same for USDJPY. Whether they go 50 or 75 next month the Fed remains a whole lot more hawkish then the BOJ and that will continue to support USDJPY. When the BOJ becomes just a bit less dovish or changes their YCC policy it will be a sharp move lower but timing is always the big question mark. Resistance 138, support 135.50.?

EUR - We know the difficulties facing the European economy. We also know the ECB is sounding more hawkish but maybe it is too little too late at this point. EUR traded down to a twenty year low just ahead of .99 overnight before bouncing on the back of moderately better PMI data. The issue is the data may be ok today but the future is looking worse and worse.?There are large option expiries between .9950 and parity over the next few days that may keep the currency pinned nearby.?

GBP - Once again, PMI data wasn't as bad as the market feared and that has provided a bit of a lift for the Pound this morning. Still energy prices are sky high, inflation is running rampant, the UK is filled with striking workers and the BOE is looking a bit lost, hard to see a massive bounce in Cable unless somehow Powell is dovish sounding and I just don't see that. The market will keep selling the bounce for now.?

?CAD - Oil seems to have found a floor, Germany (and let's face it all of Europe) wants/needs Canada's energy and the BOC is one of the only central banks that is matching the Fed's hawkishness. It is tough to be bearish CAD right now in my view. Still risk off/flight to safety leads to a stronger US Dollar and a rising tide lifts all boats so if equities stay under pressure USDCAD may drift higher. That being said, selling bounces on a 1.30 handle has been a decent trade. Maybe look to trade a 1.2700-1.3200 range for a while.?

?Good luck.?