Today's FX Comment

January 13, 2025?

Good morning, happy Monday. I hope you had a nice weekend. It was a tough one for me as my Steelers' NFL season came to a sad end. I would also say that my wife was not thrilled with the amount of football I watched this weekend, not sure how I'm going to break the news that I'm watching the Rams-Vikings game tonight...

New week, same old story. We kick things off with higher yields and lower equities. Japan was closed for a holiday but the Asian markets that were open were lower across the board. China posted a better than expected trade balance with exports jumping 10.7% versus 7.3% expected and normally that would be viewed as a positive for Chinese economic growth but there are two mitigating factors: 1. The export growth can likely be chalked up to some front-loading ahead of expected Trump tariffs and 2. The larger than expected trade surplus will simply upset Trump and provide him with more firepower for punitive tariffs. PBOC Governor Pan Gongsheng reaffirmed that China would raise its fiscal deficit and stated that the central bank had a goal of "reasonable equilibrium" level for the Yuan but we know that one way to fight Trump tariffs is to let your currency weaken. One thing to note: you have to wonder how effective these tariffs are, the data today showed that China’s trade surplus with the rest of the world reached a record of almost $1trillion in 2024. No slowing things down it seems….

Things aren't much better in Europe with indices lower across the board to start the week. UK yields are hitting 27 year highs amid a growing fiscal crisis, energy costs are rising with Brent crude hitting its highest level since late August ahead of expected tighter US sanctions on Russian oil exports and the threat of Trump tariffs looms while economic grow the remains anemic. Not pretty.

Futures point to losses on the open in North America as equities clearly continue to struggle under the weight of higher yields. You have an incoming President who has said inflation and interest rates are too high yet has plans to cut taxes and implement tariffs that many believe will cause even greater inflation which in turn will lead to higher yields and the Fed keeping rates elevated for longer (even more talk starting to creep in about how the next Fed move might be a hike). That is called irresistible force move meets immovable object.

I have a feeling that if/when stocks continue to tank, President-elect Trump will dial the tariff talk back a bit, we'll see, he does measure himself to a fair degree by stock market performance. Really, with decent job growth, 4.1% unemployment and GDP running around 3% are tax cuts and tariffs needed? The US economy looks to be in pretty decent shape, maybe the best thing President Trump could do is stop all the tariff threats which in turn might lower inflation expectations and ultimately allow the Fed to cut rates a bit more. That might be the best thing to keep the US economy chugging along.

Final thought: Potential 2025 black swan event? It has been reported that office vacancies have hit a record high in the US despite more folks returning to the office. High vacancy rates and higher yields are not a great recipe for commercial real estate. Potential cause of significant market stress at some point this year?

FX thoughts:

JPY - Japan was closed for holiday but the Yen is supported today by rising Japanese yields (Japan 10 year yield at its highest level since 2011), thoughts of a more hawkish BOJ and of course plain old risk off with stocks under pressure. 158.80 is resistance, support 156.15 and 155.45. We know it is likely that Japanese authorities will continue to verbally intervene against Yen weakness and we know that verbal intervention can get real in a hurry. Woth a look at downside option structures with spot up here?

AUD - The Oz is trading through key support at .6170 this morning, I think the move lower is likely overdone but old habits die hard and weaker equities typically mean a weaker AUD. There isn't much support in between here and 60 cents but are things really that bad? Look at some longer dated AUD Call spreads.

EUR - ECB Chief Economist Lane noted today that there is probably more easing to come from the central bank as inflation pressures continue to soften this year. No surprise but the comments are being blamed for some of the weakness in the Euro this morning. The market will remain content to sell the Euro on rallies until we see either some softer US data or Trump dial back the tariff rhetoric. Next support between 1.0080-1.0100.

GBP - UK's Labour party states: "Our fiscal rules are non-negotiable and will apply to every decision taken by a Labour government. This means that the current budget must move into balance, so that day-to-day costs are met by revenues and debt must be falling as a share of the economy by the fifth year of the forecast." UK PM Starmer says the party remains committed to those fiscal rules so that means either higher taxes (not a big vote getter) or spending cuts (the lesser of two evils). Right now the market is pushing to see if Labour will abandon their rules, they better not or things will get even uglier for Gilts and the Pound. Support ahead of 1.2000 in Cable.

CAD - Compared to Europe, Canada doesn't seem to be in a bad spot right now. Job growth has been quite good two months running, oil prices are moving higher and while we don't have a working parliament maybe that is viewed as a good thing. I mean we know PM Trudeau is a rather lame duck and regardless of who leads the Liberals, the odds still favour a conservative majority in the next election (lower taxes? less regulation? better relations with Trump?). Of course, Trump tariffs loom but you have to wonder how much bad news is priced in. USDCAD has moved up from 1.3950 on November 25th (when Trump first threatened across the board 25% tariffs) and the fact is, when you take away energy, the US is running a healthy trade surplus with Canada.? I have a feeling we might avoid the worst result and that energy and auto parts might not be subject to tariffs. You can't run out and buy the Canadian Dollar just yet as you never know but 25% tariffs on energy and autos would be particularly inflationary, not something Trump likely wants or needs. Resistance 1.4430 and 1.4465, support 1.4380

Good luck.