Today's FX Comment

July 12, 2022?

Good morning, I finally saw Top Gun: Maverick the other night and it reminded me a lot of Top Gun: the original but it was a lot of fun. Sort of what you need to escape this downer of a market!

I wish I could start out a different way but I can't, it's another risk off day. Take your pick: covid concerns, earnings season concerns, inflation, recession, stagflation, forward guidance worries or all of the above it just continues to weigh on sentiment.

Overnight, Asian indices were lower led by the Nikkei. There were a grand total of 59 reported covid cases in Shanghai but of course we all know China is pretty strict on those lockdowns and there are reports of selected restrictions being put in place across the country. We should be used to it by now...European markets haven't fared any better and are a sea of red. Sentiment is clearly battered with the German ZEW survey printing far below estimates with the expectations component coming in below levels we saw at the onset of covid and back to levels last seen during the debt crisis in 2011. Hard to believe sentiment is so poor with the unemployment rate at the lows.... Futures point to losses on the open in North America but take heart: PepsiCo earnings beat and the company actually raised its revenue outlook for the year!

Commodities remain under pressure with crude lower on demand concerns, iron ore under pressure once again and copper at the lows of the year trading back to levels last seen at the end of 2020.

Commodities lower, consumer confidence in the dumps and inventories growing, I'm sure tomorrow's US CPI number will be running hot, but it sure does feel like we are heading into a much more dis-inflationary environment at the moment doesn't it? I say 75bps this month, another 50 from the Fed in September and then maybe, just maybe they step back to assess the impact and let rate hikes sink in, we'll see.

FX thoughts:

AUD - Australian business confidence data was weaker than expected overnight, softer commodities aren't helping and negative risk sentiment is weighing on the Oz at the moment. .6685 should be very good support but until equities manage to steady and build on some gains it will be difficult for the Oz to have a sustained bounce.

JPY - Maybe a small warning shot for long USDJPY positions? Japan's Finance Minister Suzuki and Janet Yellen issued a joint statement and noted that they would continue to consult on FX markets and cooperate as appropriate. I think coordinated intervention remains a long shot and Yellen did note that Forex intervention was warranted only in rare circumstances but maybe its a small caution sign to the market? Maybe 140 is a line in the sand? We'll see because for now talk is just talk and I think the market will keep pushing and we may see USDJPY grind slowly higher until we reach a trigger point where we see actual intervention.

EUR – Like we just said, talk is just talk and I think it is too late for the ECB to verbally intervene to save the Euro at this point. It will take concrete action in the form of rate hikes to help prop up the currency. In the meantime, as the Euro drifts lower (there is debate if parity actually traded overnight) the ECB's inflation fighting mandate just keeps getting harder. The ECB is way behind the curve but it is not too late to get their head out of the sand and get moving on rate hikes. Time to stop dithering and show some resolve. Parity is obvious support but its more psychological than anything else, after that its .9945 and .9850.

GBP - The UK leadership race is getting underway but it matters little to the currency at this point. Sterling remains under pressure and I think the market will remain firmly in sell rallies mode until the BOE signals more aggressive rate hikes or we get some kind of sustained equity market rally. We are back trading on 1.1840 support and the scary thing is there isn't much more on the downside until that covid low of 1.1412. Like the ECB, the BOE's job just keeps getting harder and harder

CAD - Weaker oil plus weaker equities usually adds up to a weaker Canadian Dollar and today is no exception. Tomorrow, the Bank of Canada should go 75bps but the market has it priced in so it will be all about the guidance Governor Macklem provides. I think with inflation running hotter than expected and showing no signs of having peaked it leaves the Governor no choice expect to remain fairly hawkish and green light further rate hikes. Of course, US CPI data could simply overshadow the BOC and if we see a big equity market sell off the 75 bp hike will get lost in the stock market shuffle. The safest play remains long CAD on the crosses. We should still see resistance ahead of the 1.3080 level, initial support 1.2970.

Good luck.