Today's FX Comment

September 23, 2021?

Good morning. A tale of central banks to start the day:

Norges Bank - First G10 CB to hike rates, NOK higher.

BOE - Sterling rallies post Bank of England as two members voted to reduce bond buying and the Bank noted developments that would strengthen the case for a "modest tightening"

CBRT - A surprise 100bp cut sent the Turkish Lira to a record low, not much credibility from the Turkish central bank

It is a risk on start to the day - so far anyways. We still don't know if Evergrande will make their offshore interest payment today but overnight there were reports that Chinese regulators told Evergrande to avoid a default which maybe the market sees as a sign of potential government support for the firm. Of course, there were further reports that China has asked local governments to prepare for the potential downfall of Evergrande so the story is to be continued. I am far from an expert here, but I don't think China simply lets Evergrande collapse, too big to fail and probably far too embarrassing as well. I would guess a restructure is in the works. At any rate, so far today risk is faring well with equities mostly higher and the US Dollar under pressure to start the session.

Circling back to the central bank theme it seems like market commentators have spoken and determined that the Fed was more hawkish yesterday. I suppose you could say they were because the taper (when it starts) looks like it will be done quickly which paves the way for a rate hike late next year (according to those 2022 dots). I suppose that does sound a touch more hawkish coming from a typically dovish Jerome Powell but we know:

- the taper can always be slowed if need be

- the market was already pretty much pricing in a rate hike next year anyway

- I don't think the dots sitting at 1.75 or 1.8% for 2024 is all that hawkish personally

I think it was like we have discussed previously, the market was caught napping by the more hawkish Fed in June. This time around I think we were more ready for an upbeat FOMC and I think the market has taken a more "hawkish" Fed in stride. Now we'll just watch for Evergrande headlines for cues toward near term market sentiment.

FX thoughts:

AUD - .7290 resistance was tested overnight and has held so far as the Oz is trading higher on the better overall risk mood. We have said over and over it will be hard for the AUD to have a sustained rally while vaccination rates remain low and lockdowns remain in place but so far the Australian economy has remained fairly resilient (Australian Manufacturing PMI data registered its 16th month of expansion last night) and I think when lockdowns end the currency will pop.

EUR - There is decent support between 1.1660-1.1700 and it has held so far but the bounce in the Euro this morning is pretty uninspiring. PMI data from Germany, France and the EU all missed to the downside today no doubt dampening enthusiasm for the currency. Still it should be noted that despite coming up short the data remains in expansionary territory so don't get too bearish yet. 1.1790 should be initial resistance.

GBP - As we have noted already (and we have been counting on all week) the BOE sounded a bit more upbeat this morning highlighting broad inflation risk and developments that would strengthen the case for a "modest tightening". We also had two members voting to further reduce QE. 1.3650 was/is major support in Cable and it bent but did not break. Payroll and wage growth has been decent in the UK and we know inflation is running hot. I think the BOE remains just a bit more hawkish moving forward and that should help to support the Pound. 1.3760 is nearby resistance.

CAD - The Canadian Dollar is the top dog in the G10 this morning and as we noted yesterday: Political risk (if there ever really was any) is out of the way with the election confirming the status quo. Oil remains well bid, the Western Select spread remains tight, Canadian employment growth remains strong, vaccination rates are high and positioning is relatively light. There doesn't seem to be too many negatives for the Canadian Dollar right now...The story has not changed.

We thought USDCAD was too high yesterday and now the level in Funds seems more reasonable but I would say if equities/risk continues to rebound (always a big if) the Canadian Dollar will be a main beneficiary.

Support 1.2620, followed by 1.2580 with the 200 day MA (1.2525) a very big level. Initial topside resistance 1.2710-20.

Good luck.