Today's FX Comment

July 23, 2024?

Good morning. I'm not sure if you are looking for a series to watch over the summer or if you have seen it already but I have to recommend the show "The Bear". I am almost finished watching season 3 and it keeps getting better and better. I think it is the best written and acted show out there right now.

Speaking of the Bear, the market started out a tiny bit bearish in Asia overnight where indices were mixed with shares on Hong Kong and China leading the way lower. Clearly, the lack of any concrete stimulus plan out of the recent third Plenum is weighing on sentiment. As for that 10bp rate cut out of China the other day, I think the market has judged it to be insufficient to have a real impact and sees it as almost a panic type reaction from Chinese authorities (they're cutting rates, the economy must be worse off than we thought). With Tesla set to report after the bell today, interesting to note that Tesla China is extending zero interest loans for Model 3 and Y cars until the end of August. How about some zero interest loans here in Canada....

European equity markets are all in the green this morning shrugging off news that France's leftist France Unbowed party took steps today to scrap President Macron's plan to raise the legal retirement age to 64 from 62. So much for that political truce Macron was looking for over the Olympics. Futures point to a flattish/slightly higher open in North America and with the Fed in their blackout period (so nice) and little in the way of key economic data today the market will turn its attention to earnings. We have heard from Coca-Cola this morning (beat) and from GM (big beat + strong/upgraded guidance). After the bell tonight it will be Tesla and Alphabet, bellwethers for market sentiment. Just keep telling yourself, whether it is Trump or Harris, the Fed and their rate cuts will likely matter more. The odds of a soft landing for the US economy look pretty good and that should be a healthy backdrop for the stock market and overall risk sentiment.

FX thoughts:

JPY - The Yen is the standout performer of the overnight session strengthening once again. There are reports of a split among BOJ members with some seeing weak consumption as a reason to stay on hold while other members don't want to risk missing out on a chance to hike rates next week. Strange to think increasing your target rate to two tenths of a percent will really hurt your economy. In the meantime, politicians seem to be getting more vocal with Japan LDP Ruling Party Secretary General Motegi stating that the central bank should more clearly indicate its policy path including outlining several planned rate hikes. There are also plenty of reports of hedge funds liquidating short Yen positions and as we have noted many times, the BOJ might be hiking rates next week, the Fed is likely heading toward a September rate cut, the 10 year UST-JGB spread continues to point to a much lower USDJPY, the BOJ is intervening and Donald Trump is making noise about excessive Yen weakness. If you are long USDJPY it is probably time to take the chips off the table. It might be time to look at downside USDJPY structures as well. Final thought, one upshot to a weak Yen: Japan saw a record 17.78 million visitors in the first half of 2024. Good time to visit! Support 155.20, sell rallies in USDJPY.

AUD - The Oz continues to struggle with concerns around the Chinese economy weighing on the currency. Copper and iron ore prices have been on the soft side as well. We are right on support at .6620 this morning next downside level is .6580. Maybe concerns around China are a bit overdone, 4.5-5% GDP growth isn’t that bad is it? Maybe time to stick your toe in the water and buy the dip.

EUR - France is leaderless with reports that President Macron may not appoint a new head of the French government until after the Olympic games end on August 11th. In the meantime news that the left is throwing fiscal responsibility out the window and is trying to scrap Macron's plan to raise the retirement age is weighing on the Euro. This morning the ECB's De Guindos reminded us that September is a good time for an ECB rate cut but we know that already. Political news isn't great but the Euro remains pretty rangey. Support nearby at 1.0840 lots of resistance between 1.0980-1.1000.

GBP - Compared to the EU, the UK looks very politically stable all of a sudden doesn't it. Another bright note: E+Y forecasts that the UK economy will see GDP accelerate next year, inflation continue to decline and notes that real incomes will continue to rise which in turn will boost household spending power and economic growth. That sounds like the definition of a soft landing to me. We flagged support at 1.2890 yesterday and it was tested and held overnight. If we see decent earnings after the bell tonight, Sterling should benefit from a boost in sentiment.

CAD - It feels like the Canadian Dollar is in a holding pattern ahead of tomorrow's BOC rate announcement. I think we all know a rate cut is a foregone conclusion it will really be more about the press conference and Governor Macklem's guidance around the rate path moving forward. I personally don't think Macklem will come across as overly dovish and do not think he will talk up the prospect of further rates cuts other than saying it may be reasonable to expect lower rates if inflation continues its downward trend. In the end. I think he will stress that the BOC is very, very data dependent. We'll see if that is enough to shake out a market that is very, very short the Canadian Dollar (based on IMM data) and is in need of more BOC dovishness. We have more or less been in a 1.3600-1.3800 range since the beginning of April, Canadian Dollar short positions look to be at record levels on the CME, you would think that if we can't really take out 1.3800 and push higher this week it might be time to re-test the bottom end of the range, and maybe even break it? FX options remain a reasonable way to position yourself for a liquidation of all those CME CAD shorts. Resistance nearby at 1.3780, support 1.3735 and 1.3665.

Good luck.