Today's FX Comment

March 10, 2021

Good morning. Or should I say good mourning to the Leafs nation after Toronto lost its third game in a row falling to the Jets last night. Not to worry the Leafs are still in first place in the North division, Stanley Cup parade plans continue....

The market has hit the pause button this morning ahead of what will be a more closely watched the normal U.S. CPI print. Equity futures point to a flattish open for the S&P, oil is little changed on the session, the US 10 year yield is a basis point higher and while the U.S. Dollar is mostly stronger to start the day gains have been fairly limited.

Core CPI is expected to come in at 1.4% YoY so we are obviously a long way from the Fed's target but I suppose any beat to the upside could see yields lift higher once again putting some pressure on equities.

We all know higher inflation is coming the next couple of months, we also know it will mainly be due to base effects and I fall in the Fed's camp and believe any uptick in inflation will be transitory. The Fed has repeated over and over again that they will look through what they believe will be a temporary jump in inflation, we also know that they just don't want inflation to hit 2% they want it to be 2% or preferably a bit higher for a sustained period before they think about raising rates, and that's if they're also happy with the level of employment. The bar for rate hikes remains high and the Fed is a long ay away from even thinking about thinking about raising rates. I also think that if yields rise and weigh on equities that ultimately the Fed will step in and act to once again support asset prices.

Stimulus. global growth, lower rates for longer and a Fed put that is alive and well (and a PBOC put too), I still think it's a decent backdrop for risk overall. Of course we'll have to keep a close eye on the 10yr Treasury auction today. Yesterday's 3year went well but 10's are where the action is....

FX thoughts:

AUD - Consumer sentiment data rose last night and is back at multi-year highs. I suppose it goes hand in hand with the jump in business confidence we saw earlier this week. Iron ore seems to have halted its mini-slide as well yet the Oz is a touch lower today. I guess we can chalk it up to RBA Governor Lowe who spoke early last night and noted that while the economy was rebounding well and that the recovery in employment has been V shaped he disagreed with market pricing for rate hikes in late 2022 and 2023 saying conditions for a hike are likely to be met in 2024. 2024 - I think that is wishful thinking on the Governor's part. I vote with market pricing on this one - of course if he agreed the currency would be 2 cents higher and that's the last thing the RBA wants....7685 should be the base and I still favour long AUD positions.

JPY - USDJPY remains supported and like we have said right now it seems you buy USDJPY if US yields move higher and you buy it when stocks move higher. Maybe its simply flow on the back of Japanese investors buying US bonds unhedged? I think it will take some heavy lifting to get through 109.30 and push toward 110 so I think we're in for a bit of a consolidation phase but I'm certainly not ready to fight this trend and go short USDJPY yet.

EUR - I think we're in a 1.1825 (maybe 1.1800) - 1.2070 range for now supported on both sides by the 200 and 100 day MA's respectively. Like we mentioned yesterday I think we'll need some "new" (and good) news to push the Euro materially higher. That might be in the form of improved vaccine rollout or the lifting of lockdowns, unfortunately parts of Europe are seeing rising covid cases at the moment so it seems that better news is still off in the distance. Keep trading the range.

GBP - Sterling continues to tread water with a good base at 1.3775 and it seems (for now at least) decent offers around 1.3900 in Cable. I still favour long positions as we know the BOE has really taken negative rates off the table and is actually sounding a tiny bit more upbeat, fiscal stimulus/support remains strong and the UK will come through lockdown in better shape than most. At the end of the day I believe the Pound remains underowned and I think if risk co-operates a return to a 1.43 handle is not out of the question. Before we get there we'll see resistance at 1.3950 and 1.4020.

CAD - It's a big day for the Canadian Dollar with the Bank of Canada announcement today - or is it? Most people expect a very much steady as she goes statement from the Bank today with Macklem and Co. readying themselves for bigger action in April when we'll get the MPR and revised economic projections.

A brief recap from our economics team:

- we should get an acknowledgement of better-than-expected growth data today but the Bank is likely to reiterate that elevated uncertainty persists, note that excess supply is expected to continue to weigh on inflation and highlight the job losses observed in recent labour force surveys. But it’s the calm before the proverbial storm in our view. We continue to expect the Bank will step down its pace of QE at the April meeting

- We’ll also be watching for them to acknowledge that Q4 growth came in better than expected while strong demand continues to boost commodity prices, and thus, the Canadian dollar. The statement may also make note of the recent rise interest rates reflecting an improved outlook. We expect them to repeat that “the Canadian economy will continue to require extraordinary monetary policy support.”

- Since the July meeting, the Bank’s forward guidance on the policy rate has been predicated on the closure of the output gap. Currently it reads, “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our projection, this does not happen until into 2023”. Importantly, with the rapidly improving economic outlook, we’ve moved our own estimate of slack being absorbed to early 2022, well ahead of Bank guidance.

And finally, even if they strike a similar note to January's meeting today, upgraded forecasts are look to be coming in April:

-The Bank’s projections do not incorporate any of the U.S. (or Canadian) fiscal stimulus that is due to be passed this year, meaning there’s still plenty of upside not yet baked in. This won’t be an issue for this March meeting as the Bank will not refresh its projections until April. It follows then, that the forward guidance should simply reiterate January’s outlook (e.g. “In our January projection, this does not happen until into 2023”). Come April though, the Bank will have to contend with the fact that even under a relatively more conservative outlook, the output gap is likely to be closed before the current 2023 timeline they’ve laid out.

WHAT DOES IT MEAN FOR USDCAD?

- I certainly do not expect an overly dovish statement so it’s either a repeat of January or perhaps something that’s just a bit more upbeat, to me that sounds like neutral to a potential positive for the Canadian Dollar.

- But could the BOC complain about currency strength? I suppose they always could but let’s put things in context, WTI has appreciated 35% YTD, Western Select 58%, the Canadian Dollar has only appreciated .6% versus the U.S. Dollar YTD does the BOC have anything to complain about? Not likely. Best save comments on the currency for when they are really needed.

- Overall, I think every central bank around the world is taking the same cautious, wait and see stance and rate hikes are a long way off everywhere. As always, the Fed has the heaviest lifting to do and likely has to stay a bit more dovish then the rest to support asset prices. Whether it is this month or next the BOC will likely start tapering and that stands in stark contrast to a Fed that won’t look at tapering at all in 2021.

I think that in the end regardless of the reaction to the BOC the Canadian Dollar will continue to benefit from a sustained pickup in global growth this year that should help to keep commodity prices and commodity currencies supported. I think the demand side of the equation will continue to improve when it comes to oil and it seems like the Saudis (and by extension OPEC+) remain serious about limiting production increases and keeping prices elevated for the time being, all feeding into CAD strength.

Beyond the BOC it may all come down to US CPI and the 10 year auction. If the auction goes smoothly equities will like it and it will be risk on.

Any way you slice it 1.2720-50 remains very good resistance and will likely continue to be the sell zone for USDCAD, initial support 1.2590.

Good luck.