Today's FX Comment

January 16, 2025?

Good morning. As I grabbed my usual coffee from Tim Horton's this morning I couldn't help but notice that next door at Burger King they are now offering a "hash brown poutine". I admit, I was tempted but I can't break my intermittent fasting new years' resolution this early can I?

Given the strong equity market performance we saw yesterday it is no surprise that risk sentiment remained on firm footing in the overnight session. Asian equity markets were up across the board led by gains in Australia (mixed employment data) and Hong Kong. The Nikkei was somewhat of a straggler as the market is pricing in a greater likelihood of a rate hike from the BOJ next week with a stronger Yen weighing on exporter names. Stocks in mainland China ended a bit higher as well as local press reports are fueling speculation that the PBOC will cut the RRR before the Lunar New Year starts on January 28th. Maybe a cut if Trump goes on the attack against China early on in his administration?

European indices are all in the green this morning as yesterday's softer US CPI/North American equity market performance continues to support. Sentiment was also given a lift on the back of some better earnings reports. The tech sector was helped after chipmaker Taiwan Semi saw its profit jump 57% and raised its capex outlook sharply while the luxury goods sector is rallying after Richemont reported a strong Q3 today. Concern over tariffs and trade wars no doubt still linger in the background though.

Futures point to a pretty flattish open in North America ahead of today's combo of US Retail Sales/US Treasury Secretary Bessant's confirmation hearing. When it comes to retail sales you have to admit the US consumer has been incredibly resilient. Trump won, stocks were closing out a terrific year and I wonder if that put everyone is a spending mood in December? Consumer spending is close to 70% of US GDP so let’s hope people kept up the shopping last month. As for the Bessant confirmation, it seems more like a mere formality but we'll keep an eye out for any comments on a strong Dollar policy and of course for any thoughts on tariffs. I think when it comes to tariffs, Bessant prefers a more targeted approach rather than a blanket move that is used as more of a blunt instrument. Let's hope his approach wins out, not just for the sake of Canada and Mexico but for the global economy. US tariffs will not go without retaliation and trade wars are not good for business.

FX thoughts:

JPY - Japanese PPI data jumped to 3.8% YoY, certainly lending a helping hand to above target CPI. Economists at the Japan Center for Economic Research also expect 4.7% wage increases at large Japanese companies this year and it seems clearer that the BOJ is in a position to hike rates. The market is now pricing in about 20bps of a rate increase next week and that is helping to give the currency a lift. USDJPY traded down through support at 155.45 overnight before bouncing but I think the market will look to sell rallies here for now. 158.80 remains the topside level to watch.

AUD - The headline employment number looked great (+56k) but the split was uninspiring with all the gains part time and FT jobs actually down 23k. Still, it is better than overall losses I suppose. The key near term driver will remain equity market performance and of course how aggressive Trump is with tariffs on China.? Resistance .6220 and .6275, support .6170.

EUR - Economic growth is wobbly, political uncertainty remains and of course you know Trump tariff threats against the EU are coming. It feels like the market will remain in sell rallies mode for the time being. Support 1.0220 and 1.0180, resistance 1.0335.

GBP - The UK economic data this morning was less than stellar with downside misses across the board (GDP, industrial production and manufacturing production). On the plus side, fears of stagflation were soothed by yesterday's softer inflation data but the UK still faces challenges with ongoing concerns over national debt and fiscal policy sustainability. Today, the business and trade secretary warned that the UK was particularly vulnerable to the impact of US tariffs because it was a very globally oriented economy reliant on international trade and investment. No kidding, once again it feels like the market will likely sell rallies here. Resistance 1.2300, support right here at 1.2190 and again in front of 1.2100.

CAD - For today it will be about broader US Dollar moves post-retail sales and post-Treasury Secretary elect Bessant's testimony but next week we know it will be all about potential Trump tariffs on "day 1". Canada has prepared a list targeting $150bln CAD worth of US goods as a retaliation measure, of course to be used only if the US acts first. Canadian Provincial leaders aren't all on board with the response though with Alberta's Danielle Smith refusing to sign the final communique. Division is probably not a good thing here. Clearly, if Trump comes in and slaps across the board tariffs on all Canadian goods, USDCAD heads higher, it is tough to tell how much is priced in but you would have to think we'll see a few big figures initially. Should Trump choose a less aggressive path (after all, who wants higher prices at the gas pump, higher inflation and higher rates) Canada breathes a sigh of relief and I think we get a healthy move lower in Funds as long held and extended CAD shorts get pared back. For today, resistance right around here at 1.4380 followed by 1.4430, support will be good ahead of 1.4300.

Good luck.