Today's FX Comment

August 8, 2022

Good morning, I hope you had a great weekend. A win by the Jays in extra innings last night while the Yankees have lost their 5th in a row, Jays are only 9.5 back now....

It is a risk on start to the week and I admit after all the hawkish talk we have heard from various Fed members lately along with Friday's blowout payrolls report I am surprised/impressed by the resiliency we have seen in equities. Given the volatility we have seen in rates and the fact that the market is getting closer to pricing in a 75bp September Fed hike I would have thought that stocks would be under more pressure. It seems sentiment has shifted though and maybe stocks were beaten down a bit too much.

Asian indices were mostly higher overnight despite US-China tensions still running high. China has announced a new set of military drills around Taiwan and while that sounds worrisome it should be noted that Taiwan's Ministry of Defense stated that Chinese aircraft and ships never entered Taiwanese waters during the most recent exercises. So far China seems content to flex their muscles and nothing more. Elsewhere the news was better out of Asia, China's trade balance hit a record high with exports jumping about 24% YoY (CNY terms) while imports rose more than expected as well. It seems like supply chain issues are continuing to improve. In the meantime, Hong Kong will reduce the period of time people entering the city must spend in hotel quarantine to 3 days from 7 days and the Civil Aviation Administration of China issued a notice on Sunday to relax circuit breaker measures that suspend international routes if the number of Covid-19 patients exceeds a case threshold. Maybe a more dynamic zero-covid policy unfolding?

European indices are all in the green despite ongoing energy concerns. The Nord Stream turbine saga remains unsolved while water levels in the Rhine are getting so low that ships have had to lighten their loads in order to navigate the waterway. Despite the less that stellar news, consumer confidence data out of Europe was better than expected this morning but as we all know, the bar for an upside surprise in any European data remains very low.

There are no Fed speakers today (shocking) but over the weekend we heard from Bowman and Daly and both stuck to the script and shared concern over still too high inflation. While Bowman seemed to lean toward a 75bp hike in September, Daly sounded a little less hawkish noting that the Fed needed to move interest rates up but did not need to be too aggressive in raising rates. Maybe lower oil prices and lower prices at the pump will let the Fed take their foot off the brake just a bit? There is still plenty of data to look at between now and September 21 and with something close to 69bps already priced in by the market maybe that leaves the US Dollar a little vulnerable to downside economic data suprises?

FX thoughts:

CAD - We have had two straight negative employment reports in Canada but after a brief move up toward resistance ahead of 1.3000 post-release we are starting the week pretty much where we were Friday morning pre-data. Canada has already made up all the covid job losses and then some so maybe we should have lower expectations from our employment reports at this juncture. The bottom line remains unemployment is at multi-decade lows and inflation hasn't really showed signs of slowing in Canada so the BOC has to keep hiking and remain fairly hawkish.

On another note, this morning's Globe and Mail ran an article about weekend emergency room shutdowns due to staff shortages (including hospitals around Ottawa, out in New Brunswick and in Alberta). Another paper ran an article about Ontario nurses moving to jobs in the US. As StatsCan notes: according to the Job Vacancy and Wage Survey, there were 143,400 job vacancies in health care and social assistance in the month of May, it seems odd to me that Friday's employment report showed 22k job losses in the health care and social assistance sector. At any rate for the time being, USDCAD will follow broader US Dollar moves. Resistance 1.2990 while the key downside level remains 1.2770.

?AUD - The Oz is the top performer among the G10 no doubt getting a lift from the strong Chinese trade data which showed imports of iron ore and coal jumping on the month no doubt supplied mostly by Australia. Better news out of China helps the currency and you know how I feel, with unemployment at multi-decade lows and inflation rising no matter what the RBA says, they will be hiking rates more aggressively. .7060 is key resistance and if equities can hang on to/build on recent gains a re-test of that level should be in the cards this week.

JPY - With the BOJ remaining dovish and holding on to their YCC policy USDJPY should continue to trade alongside US yields. 134.30 is nearby short term support, topside level is 135.50.

GBP - The BOE sounds downbeat about the UK economy so the market will likely start to pay even closer attention to the UK data for signs of an impending recession. 1.2290 is a decent topside level, support 1.2020.

EUR - No change here, things still don't look great for Europe, inflation, the war in Ukraine, hot weather, low water levels and energy concerns. That being said, maybe the bad news is priced in? Maybe it can't get much worse (until winter and Putin cuts off gas supply). Maybe if the ECB keeps hiking the Euro has seen the low? 1.0270 is initial topside resistance followed by 1.0350.

Good luck.