Today's FX Comment

December 13, 2021

Good morning, I hope you had a great weekend. I spent it wrapping up the Christmas checklist. Liquor store run check, Costco run check, wife's Christmas gifts check (always have to check the store return policy on that one...)

As we get prepared for a central bank heavy week a couple of familiar themes are playing out:

- Stocks are higher once again and who would have thought a few short weeks ago that the S&P 500 would be at an all time high in the face of a new covid variant and a more hawkish Fed. I guess the big question will be can equities build on gains after the Fed confirms a faster taper later this week.

- US Dollar outperformance, the Big Dollar is stronger across the board to start the week no doubt supported by the expectation of a more hawkish Fed. With the majority of the market now expecting the pace of tapering to double (Bullard finally gets his way) and wrap up in April and the market also pricing in something like a 75% chance of a May hike you have to wonder if Powell can exceed the already hawkish expectations and if Wednesday's Fed may become a buy the rumour/sell the fact moment for the US Dollar, just a thought.

In the meantime Asian indices were mostly higher overnight with European markets following suit with rising expectations of increased fiscal stimulus out of China strengthening risk sentiment. Oil is a touch softer to start the week no doubt weighed down by omicron headlines.

FX thoughts:

AUD - Expectations of more fiscal stimulus out of China should be a plus for the Oz but the currency has been swept up in the broader US Dollar move and is trading lower this morning. I still can't help but feel the market will be prone to short squeezes here given positioning. .7170 remains nearby resistance with initial support at .7120 followed by .7075.

JPY - The Tankan survey was softer than expected and a BOJ official warned they might get worse going forward as the surveys probably did not consider impact of omicron. Overall, I don't think it matters much, we know the BOJ will be keeping rates lower for longer than anyone else. We are trading right on some resistance at 113.60 but 114.50-70 remains the major topside zone.

EUR - It is hard to see a silver lining for the Euro at the moment with rising covid numbers and lockdowns/restrictions. Geopolitical concerns aren't helping either and if Putin gets hit with sanctions why do I have a feeling natural gas might be running in shorter supply to Europe this winter, with higher prices as a result. Stagflation anyone? Initial support 1.1220, I think the market will still sell rallies ahead of 1.1400 here.

GBP - Sterling can't catch a break. The political situation has improved with UK PM Johnson reportedly not looking to remove the ECJ from their role of enforcing the Northern Ireland protocol and the French government dropping the threat of trade war with UK after being granted some more fishing licences. That good news has been offset by negative covid news though with reports of 50,000 new cases and PM Johnson warning of a tidal wave of omicron infections. There are still a few bps of hikes priced in for this week's BOE meeting but it is highly unlikely they hike against the current backdrop. 1.3220 remains key support and is the level to watch on a closing basis.

CAD - The positives: equities are at all time highs, oil looks like it has found a bottom and has posted terrific gains this year and the BOC will likely be upgrading their economic outlook next month and hiking in 2022. Those are all very supportive factors and should limit losses for the Canadian Dollar. That being said, if you are a CAD bull you have to be a bit concerned that things have gone quite well and the currency has failed to make headway versus the US Dollar (CAD does look pretty good on the crosses though).

I still believe global growth trends higher next year and the BOC will be hiking more than the Fed in 2022 (although not 5 times- 4 is a lot more likely) and that means I think you can sell rallies in USDCAD. Market reaction post-FOMC will obviously be key, as mentioned previously maybe it become a sell the fact event for the US Dollar. Resistance 1.2800, initial support 1.2670.

Good luck.