Today's FX Comment
Patric Booth, CFA
Managing Director, Fixed Income and Currencies at National Bank of Canada
January 8, 2025?
Good morning and happy hump day. I almost feel like saying "coming to you from the 51st state", of course we know the Republican party will never have Canada join the U.S., we'd have as many electoral college votes as California and probably vote Democrat every time...
Bond yields keep rising increasing borrowing costs, equities are starting to get weighed down by those higher yields as well. I think we're in for a rough patch for stocks and I wonder if a more sustained drop will temper President-elect Trump's rhetoric.
Overnight, Asian equity markets were mixed with Australia and South Korea outperforming while the Hang Seng remains under pressure (now down 5% over the last month). Things were encouraging in the land down under as core CPI came in softer versus the prior release (although at 3.2% it still remains above the RBA target) while stocks in Hong Kong and China continue to struggle as China's latest attempt at stimulus via a consumer goods trade in program failed to impress. Chinese press continues to report on the prospect of "forceful" monetary moves to support the economy but maybe China will wait and see how harsh Trump tariffs will be before acting. The easiest thing to do: weaken your currency and the Yuan continues to soften hitting 7.3318 the highest level for USDCNY in over a year.
European equity markets are all in the red this morning. Take your pick: tariff fears, trade war concerns, weak German factory orders data, soft economic sentiment data, higher yields. Not much to cheer about right now.
Futures point to losses on the open in North America and clearly sentiment has taken another turn lower after CNN reported this morning the President-elect Trump is considering declaring a national economic emergency as grounds to justify the imposition of tariffs pretty much everywhere it seems. Article here if you haven't seen it:
I'm not sure how there can be a national economic emergency with the unemployment rate still low at 4.2% and US GDP running somewhere around 3% but I guess it is just another tactic in the negotiating tool kit. Why not, Trump has already talked about taking over Greenland, the Panama Canal (maybe by force), renaming the Gulf of Mexico, slapping tariffs on China, Canada, Mexico and Europe let’s add in an economic emergency to the mix as well. The result thus far is higher yields and I think it will mean even weaker stocks. Feels like it will all end in tears. I have been thinking a 10-12% pullback in equities will dial Trump back, maybe we're in for more like a 15-18% drop....these yields are getting concerning.
FX thoughts:
JPY - The US 10 year yield keeps trucking higher dragging USDJPY higher alongside (although the 10 year JGB yield is hitting its highest level since 2011 as well). I see 158.80 as resistance and Japanese officials may wait and see what Friday's payrolls data brings but you have to expect the verbal intervention to ramp back up once again.
AUD - Headline CPI has been ticking higher and was hotter than expected last night. Core inflation came in at 3.2% which was an encouraging improvement over the 3.5% prior print though. Australian job openings climbed 4.2% QoQ pointing to a still robust employment situation. Overall, inflation remains above target and the job market looks healthy. Still no rush for the RBA to cut rates. Support .6170, resistance .6335.
EUR - German factory orders data came in very weak while EU economic sentiment data softened as well (no surprise I guess). Threats of Trump tariffs hang over Europe's head and the market remains content to sell rallies. Support at the January 2 1.0226 low.
GBP - Press reports say that UK Chancellor Reeves is facing 6.4bio GBP blow from rising bond yields and is on the verge of breaking her own fiscal rules as borrowing costs increase. Reeves apparently has a cushion of about 1bio left before she faces a choice between tax increases or spending cuts, neither of which sound great for the UK economy. Sterling is the clear underperformer of the day on the news and is threatening the April 1.2300 low. Reeves had best maintain some semblance of fiscal responsibility or things will get very nasty.
CAD - Interesting note: Trump has complained about Canada's trade balance with the U.S. but if you remove oil and gas our southern neighbor enjoys a trade surplus of $58 billion with Canada. I'm not sure the details will matter that much to Trump though. We'll find out after inauguration day but I have a feeling Canada's energy exports to the US will avoid harsh tariffs (higher pump prices aren't good for politicians) and I'm thinking auto parts might be exempt as well, I mean who wants higher car prices. Dairy and lumber? Probably tariffs there but we've been down that road before. Support at 1.4305 resistance around here at 1.4380 followed by 1.4430.
Good luck.
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