Today's FX Comment

August 1, 2019

Good morning.

No need to do much of a re-hash of yesterday's FOMC by now we all know the market has voted and it is a hawkish cut. We also know that President Trump isn't happy.

While Powell may have dashed the hopes of those looking for deeper rates cuts he did not shut the door to lower rates as needed, it's simply not time to panic just yet.

Maybe Powell's performance yesterday was a way of demonstrating independence from Trump or maybe Powell is trying the wake the market up to the fact that they can't be spoon fed rate cuts every time they want. Or maybe it's simply the fact that the U.S. is near full employment, the S+P is up 20% YTD and GDP is still running at a healthy clip so maybe, just maybe we don't need to panic and point to deep rate cuts just yet...

I have said the market was pricing in an awful lot from the Fed and there was room for disappointment and the market is now disappointed. I think equities struggle in August.

 Thoughts for the day:

GBP - The BOE left rates unchanged as expected but did cut their growth projections. The detailed projections did not include a no-deal scenario (how many economists do you have working for you and you couldn't produce that? I suppose they didn't want to be accused of fear mongering) so really I don't feel it's of too much value. It comes down to this: if we have a hard Brexit Sterling will trade lower, the will be a huge amount of uncertainty, capex gets cut even more and the BOE probably moves rates to zero and ramps up QE.

I think the speed of the move lower in the Pound has caught the market off guard and I think everyone is looking to sell rallies. I have said it before, the headlines will probably be pretty negative in the near term and unless we see talks re-open on the Irish backstop (unlikely right now) I just can't see any sustained strength in Sterling.

Keep selling rallies, I would think offers rest between 1.2180-1.2220 now and the downside target initially will be just ahead of the psychological 1.2000 level, call it 1.2015.

 EUR- We saw PMI data out of the Euro zone this morning with French data missing to the downside while German data barely beat. Let's put this in perspective though, the expectations for the German PMI data were so low (43.1) that it was an easy a beat as you are likely to get.

The story hasn't changed for me: inflation is way below target, non-existent growth (recession??), the threat of Brexit, and a central bank that seems to want to add more stimulus but also seems a bit lost at the moment. It just feels like they aren’t many positives for the Euro and it will continue to grind lower.

1.1000 will be obvious support and there will be option barriers and buying interest ahead of that level for sure but like the old Randy Travis song says "It's Just a Matter of Time". Keep selling rallies.

 USDCAD - Yes, GDP was better than expected yesterday but that is a distant faded memory after Powell's midcycle adjustment. Positioning is pretty clean but if anything I think fast money might still be a little long CAD.

My base case had been 25 from the Fed yesterday/25 in September and then a BoC rate cut in October. Admittedly post-Powell my September Fed call may be in jeopardy but it may not be, I'll tell you right now if stocks slide 5-7% in August rate cut expectations will grow. Even if the Fed holds off until October the BoC can still go and we could see tandem cuts on October 30.

Regardless I had been saying the market was pricing in too much from the Fed and not enough from the BoC and that has proved to be the case.

We are trading right at resistance between 1.3225-30 in USDCAD this morning and we may see a few offers come in early but I think you buy the dip. My initial target is 75 cents or 1.3333.

 Today's range: 1.3195-1.3265

 Good luck.

 Trades we like:

1. Long vol – You can pretty much take your pick in any pair or pairs. After Powell yesterday directional trades via long USD Calls make sense.

2. USDCAD – Long a 1.3195 USD Call, expiry August 21, premium 58 CAD pips