Today's FX Comment

October 3, 2022

?Good morning. I hope you had a nice weekend. I am happy to report this weekend seemed to mark a turning point in my NFL football pool as I finally has a decent result. Let's hope October marks the turning point for the market as well and we can put an awful month of September behind us.

?Two bright notes to start the week, one: over the last twenty years October has actually been a decent month for equity market returns with the S&P averaging a gain of 1.33% (4th ranked monthly return) and two: the US midterms are drawing closer, the S&P 500 has historically outperformed in the 12-month period after a midterm election, with an average return of over 16%. As Bill Murray's character Carl Spackler said in the movie Caddyshack "so I got that going for me, which is nice"...Let's hope future returns mimic historical gains...

With China out for the Golden Week period things were a bit more subdued in Asia overnight. China does look more determined than ever to help out their ailing property market though with reports that the government will require state-owned banks to add at least CNY600B in financing to the real estate sector in the last four months of 2022. The PBOC also cut the personal housing fund loan rate starting this month.

European indices are mostly lower to start the week playing a bit of catch up with Friday's afternoon sell off in North America. The UK has walked back some of their recent tax cuts which has lent some support to Sterling this morning but elsewhere the news doesn't seem great. European PMI data was mostly weaker today and of course we have the ongoing war in Europe and you have to wonder just how desperate Putin is getting with Ukraine making further advances and tens of thousands of men lining up to escape Russia and military service.

Futures point to gains on the open in North America, but I think they did on Friday as well so let's see where things are at 4pm. I don't know how many Fed speakers we have on tap this week but by now we know each and every one of them will say the Fed has more work to do on inflation and that rates need to go higher. Time to get some new material. The Fed make a huge mistake on thinking inflation was transitory and now I can't help but think they are making another mistake by hiking rates aggressively without taking time to better gauge the impact of their actions. We get it, you want to make up for your past mistakes but as the old saying goes, two wrongs don't make a right. The strong US Dollar is becoming more problematic, things are destabilizing with an awful lot of volatility in various asset classes and now we have reports of potential issues with a major bank. I know the Fed needs to reign in inflation but they don't need to be a bull in a China shop. Let's hope they remember that inflation and employment are lagging indicators.

Circling back to Europe for a moment one economist noted today that excluding the initial pandemic lockdowns, EU manufacturers have not seen a collapse of demand like this?since the height of the global financial crisis back in 2009. The Fed will say that is Europe, our policy is US focused but when you hear something like that, it sure does seem that there are some powerful deflationary forces at work in the world.

?FX thoughts:

AUD - We have the RBA rate decision later this evening and they will hike 50bps (market has about 40bps priced in) of course Governor Lowe might say that the magnitude of rate hikes will slow moving forward and that may weigh on the currency. We'll see, it will be all about the discussion post-hike. The Oz is trading, just above support at .6440 this morning. Levels remain the same: Support .6440 followed by .6310, resistance .6570.

JPY - USDJPY is pushing higher with the market probing above 145 overnight looking for signs of the BOJ. I think it is best to be cautious up here as you never know when we might see intervention but it seems like until the BOJ budges on easy policy and YCC (or the Fed pivots) the market will keep buying dips in the pair. Japanese PM Kishida stated that he wanted to use the weak currency to strengthen Japan's economic structure. I'm not sure what the exact plans are, but that doesn't sound like someone who is too bothered by a soft Yen.

EUR - Soft PMI data, high energy prices and ebbing consumer and business confidence don't typically make for currency strength and the Euro is softer to start the week. On the plus side, the ECB has finally turned more hawkish and with the Ukrainian military making gains and support in Russia for the war slipping maybe it makes some kind of peace just a bit more likely. For now I think you keep trading a 9500/.9850 range.

GBP - The Conservative government trails the Labour party by 33 points in recent polls and I don't think things will get much easier for PM Truss. Walking back tax cuts is probably the right thing to do but it sure makes a politician look vulnerable. The BOE rode to the rescue, rolling back those tax cuts helps a bit more and it looks like 1.0350 was a blow off bottom. That being said, we'll need to see the BOE get more aggressive with rate hikes and need a more credible cost cutting plan from the UK government sooner rather than later to see more sustained strength in Sterling. 1.1280 remains tough to crack on top, if it goes next resistance is 1.1410.

?CAD - The Canadian Dollar continues to trade on the back of overall risk sentiment and broader US Dollar moves. Maybe that changes later this week with the employment data. We have seen three sub-par prints in a row in Canada, a fourth and the BOC might seriously question just how much they should hike later this month. Of course, Canada is due for a better print and maybe we are finally set for a softer NFP number? For now we continue to run into offers around 1.3800, there isn't much support on the downside until 1.3650. Overall, you would think we have to be getting closer to a top in the US Dollar.

?Good luck.