Today's FX Comment

Today’s FX Comment?

Good morning. Overnight Asian equity markets were weaker with the Hang Seng once again leading the way lower down another 2% on the session. At the moment it is hard to escape the negative sentiment around China's property market. Despite various reports of support for the battered sector the market remains overwhelmingly bearish. On the currency side the PBOC continues to fix the Yuan stronger at 7.1031 (strongest level since early June) for a long time USDCNH wasn't tagging along but that pair has moved steadily lower from 7.34 at the start of the month and is flirting with the 200day MA this morning (7.1380) something we haven't seen since last May.

European indices on the other hand, are all in the green this morning. A more dovish sounding Fed member Waller yesterday is no doubt still helping with sentiment getting an added lift from softer inflation data (lower than expected CPI numbers out of Australia, Spain as well as regions of Germany). The ECB's Stournaras also noted that while a rate cut in April might be overly optimistic, one by the middle of next year was a real possibility. Less hawkish central bankers always help.

Futures point to some healthy gains on the open in North America. Clearly yesterday's Waller comments are still filtering through the market and we could also be seeing some ongoing month end window dressing helping to lift stocks. At the end of the day, there is an awful lot of cash sitting in money market funds that could be deployed into equities and as we have noted previously, FOMO might kick into higher gear with the thought that not only is the Fed done with hikes but cuts could be coming sooner than previously expected.

Let's go back to the end of October, the US 10 year yield had just touched 5.01% and equities were reeling with three straight months of losses. Bill Ackman was first, telling us he covered his short bond position on October 23rd, next up was Bill Gross buying SOFR futures, then Stanley Druckenmiller saying he bought two year Treasuries and finally Jeff Gundlach told us to buy long dated bonds. Voila, here we are one month later with Bloomberg reporting global bonds are heading for the best month since 2008 and helped by lower yields (and softer NFP and US CPI) the S&P is up almost 9% MTD. What a difference a month makes. Note to self: next time those guys all go one way, best to listen and get the trade(s) on.

FX thoughts: The US Dollar initially traded lower in Asia with the US 10 year yield dipping to 4.25% but has since rebounded with the 10 year back to 4.29% to start the session. Softer inflation data out of Europe has also helped the Dollar bounce. The questions: will we see some more month end related US Dollar selling (the answer: maybe) and does the US Dollar selloff continue into December. As we noted yesterday:

- The US Dollar has been supported by better US economic data and Fed rate hikes this year, the data has slowed of late and the Fed looks like they are done hiking

- Bloomberg notes the latest IMM data shows leveraged names net long US Dollar positioning has risen to the highest level since February, 2022

- DXY is trading (and holding) below the 200day MA for the first time since August

Throw in seasonality. DXY returns for December as follows:

- last five years, down five times average return -1.56%

- last ten years, down 8 times average return -.82%

Maybe the Dollar selloff continues into year end.

JPY - BOJ member Adachi reiterated that the central bank needed to continue with easing and that the BOJ was not at stage to discuss exit strategy. The market didn't pay too much attention as it was nothing new. The US 10 year yield continues to drift lower and that should drag USDJPY lower alongside. The pair is back just above 147.40 support after trading down to a 146 handle overnight. I think 144.50 is a viable target.

AUD - Australian CPI was softer than expected at 4.9% YoY and that has taken some of the shine off the Oz with the currency back at what should now be support at .6620 this morning. At the end of the day 4.9% is still pretty far from the RBA's target so I don't expect Governor Bullock to back off the hawkish talk. Stronger equities should support AUD as well, maybe this is the dip to buy.

EUR - The ECB will be a bit happier this morning with weaker inflation data out of Spain (core 4.5% versus 5.2% prior) and Germany (headline 3.2% versus 3.5% expected). EU economic sentiment data was a bit better than expected as well. Too early to declare it decisively but maybe the worst is in the past for the European economy. Resistance 1.1040, support 1.0880.

GBP - Compared to the Fed's Waller, BOE Governor Bailey is actually sounding hawkish reminding the market again this morning that the central bank is not in a place to even consider rate cuts. With core CPI still running at 5.7% YoY, the Governor has that right. Cable continues to trade on the back of overall risk sentiment at the moment. Support 1.2655, resistance 1.2740.

CAD - This week might just tell the tale for the Canadian Dollar with GDP data tomorrow and the Employment Report on Friday. I do not know to many people who are upbeat on the Canadian economy and fewer still who are bullish on the Canadian Dollar, maybe a lot of the bad news is already priced in? Certainly any upside surprise in the data would catch the market the wrong way, especially with those IMM positions still looking rather extreme. Today and into tomorrow might be all about month end flow, but GDP and employment have the potential to be real movers. I would say the larger reaction comes on the back of better prints. Long gamma into the data is the right way to be, take a look at 1-3 week vol, likely worth a buy. Support 1.3518 (200day MA), resistance 1.3620.

Good luck.