Today's FX Comment

February 26, 2024?

Good morning and TGIF. Last night I caught the first episode of Law & Order Toronto. It was kind of cool to see familiar places around the city in the show. The plot centered around a murder and no the judge didn't ask if the perpetrator if he pleaded sorry or not sorry, it wasn't that Canadian...

Last night's Law and Order episode was definitely more exciting than the market feels this morning. We have no Fed speakers today (kind of shocking but very welcome) and no key data to look at before we head into the weekend. Overnight, Asian indices were mostly higher continuing to bask in the after glow of Nvidia earnings. Equities in mainland China have now rallied eight straight sessions with the Shanghai index re-taking the 3000 level. China's New Home Prices data for January showed another decline (-.4% MoM) making it the seventh consecutive monthly drop but the market is taking the glass half full approach noting that the pace of the decline is slowing. It feels like at least part of the market believes (hopes?) China's economy is bottoming out. A fresh round of PMI data out of China next week might tell the tale.

European indices are all in the green this morning despite some more hawkish sounding rhetoric from various ECB members regarding the timing of rate cuts. Germany's IFO business sentiment climate data improved and was a bit better than expected helping to give sentiment an extra boost.

Futures point to a flat open in North America and I guess it is no surprise the market is taking a bit of a breather today after yesterday's stellar performance. I know I am stating the obvious here but stocks have been absolutely ripping since bottoming at the end of October (SPX +23.5%/Nasdaq +27%) and post-NVDA there have been comparisons around the AI frenzy to the old dot com bubble at the end of the 90's. I'm not sure that is a valid comparison though. At the end of the day, big tech is generating a lot of revenue and is making a lot money and really it goes beyond tech, about 80% of the companies in the S&P 500 beat earnings estimates in the latest reporting season (tech = 84% beat, healthcare 85%, energy 90%). Think about this: the Fed hiked rates more aggressively then we have seen in decades, stocks have weathered the storm, rate cut expectations have been pared back massively this year and stocks have performed incredibly well. What happens if we get that soft landing (or no landing) that no Fed has ever managed to achieve before, what happens when the Fed does eventually start to cut. Plenty of cash still sitting on the sidelines and no doubt FOMO is growing stronger every day.

FX thoughts: Given that the S&P is up about 5% this month we will no doubt hear talk about month end related US Dollar selling. I would not be surprised to see the Dollar under pressure next week.

JPY - Former BOJ member Sakurai said that the BOJ was growing more likely to shift policy either in March or April provided this year’s wage negotiations result in pay hikes of greater than 4%. I think that is a very likely scenario and ultimately think that coupled with Fed rate cuts should help push USDJPY lower. Watch for more verbal intervention on any move higher in USDJPY. 149.70 remains initial support followed by 148.60.

AUD - No change here, I still like buying dips and/or AUD Call spreads. As long as stocks hold up and risk sentiment remains solid the Oz should perform well. You know I think that RBA rate cuts will not be happening this year and maybe China's economy has bottomed. We are just above .6570 resistance this morning, next topside level is .6620.

EUR - The ECB's Holzmann stated that it was better to cut later than too early while Nagel said that the inflation outlook was not clear enough and that a premature cut could result in worse outcome. It seems the ECB has joined the Fed in preaching patience on rate cuts. Euro is holding just above the 200day MA this again morning (1.0828) next topside level is 1.0890 (50day MA at 10886), support 1.0760. Maybe we see month end demand next week.

GBP -Core CPI is still on a 5 handle, wage growth is on a 6 handle, it is hard for me to see rate cuts anytime soon from the BOE let alone by August as the market seems to be thinking. A rate cut by that time would require a 2%+ drop in core inflation in next 4-5 months, that is a tough feat. Cable looks like it might be back in the old 1.2650-1.2740 range.

CAD - The softer Canadian inflation data is now a faded memory for the market and the 1.3520-50 area has solidified itself as good resistance. Think about this: we have seen some pretty extreme re-pricing of Fed rate cuts since the start of the year and we have seen some quite surprising softer inflation data out of Canada ratcheting up the odds of BOC cuts and the best USDCAD could do was get to 1.3586. What can't go up eventually comes down, USDCAD has had a good run at the topside, the Canadian Dollar has survived the selloff after the surprise drop in inflation and that 1.3520-50 resistance area has held...Stocks up + oil holding steady, maybe it is time to test lower and month end might be the opportunity. Support 1.3415 and 1.3380.

Have a great weekend.

Good luck.