Today's FX Comment

December 6, 2022?

Good morning. Tentative might be the word to describe the market so far today. Futures point to gains on the open in North America but it has been a very mild rebound in equities following yesterday's sell off. Overnight Asian indices were mixed. China continues to slowly grind toward a reopening but let's be honest, it's not going to happen overnight. Things are moving in the right direction but it seems like it would be more realistic to expect Q1 2023 for a grander reopening, in the meantime the market has to be satisfied with smaller, measured steps.?

European indices are all in the red this morning, a bit of a hangover from yesterday's selloff no doubt. Perhaps also some nervousness as the market awaits the Russian response to the oil price cap. Crude is lower to start the day on concerns China's reopening isn't moving fast enough and the US Dollar is mostly weaker against the majors save for the Canadian Dollar. Stocks are trying to rebound from yesterday's selloff but it may be a struggle as it feels like the market is prepping for a hawkish Fed. I personally think various Fed members have already told us the dots are going higher so when we get the new summary of economic projections should it really be a big surprise? Remember Powell said just last week the Fed does not want to crash the economy. It is 50bps and I am sure Powell will say rates need to go higher still, he will also remain resolute in the inflation fight but the shock and awe rate hike period is over. Don't be surprised if we start to see 25bp increments starting in February - data dependent of course.?

?FX thoughts:?

JPY - BOJ Governor Kuroda stuck to the dovish script last night saying it will still take time for the central bank to reach its goal and that it was too early to discuss changes to policy framework. I suppose softer Japanese wage data overnight helps Kuroda stick to his stance and there probably won't be much of a policy change, if any, until there is a new BOJ Governor. The market is still long USDJPY though and a dip in the US 10 year yield this morning has pushed the pair lower. I still think as the Fed slows the market will be more inclined to sell rallies than buy dips.?

AUD - The RBA hiked 25bps last night and it was deemed a hawkish hike as they left the door open to further increases and reminded the market they were not on any set path. Unemployment remains at the lows and inflation is high and has yet to show signs of peaking in Australia, of course the RBA will need to increase rates further. Rather then front load they are simply playing it slow which will draw the process out longer. China reopening, even if it is a slow process, will be a boost for the currency. I remain in the buy the dip camp here. .6900-15 is the next target.?

GBP - Cable is bouncing this morning as the US Dollar is broadly weaker and stocks are trying to push higher. The UK data wasn't great though with Construction PMI coming in softer with expectations slipping to the lowest level since May 2020 (and since 2009 if you exclude the covid pandemic).?I think the Pound comes crashing down at some point but calling a top is difficult. GBP Put spreads remain a good way to play a move lower.?

EUR - German factory orders were better than expected this morning but the ECB's Lane remained his dovish self and reminded the market that inflation has likely peaked and that the bulk of the work had been done by the ECB. Seems odd to say that with 10% inflation and a target rate at 1.5%...It looks more and more likely that it will be 50bps this month from the ECB. 1.0640 is the next topside target. Support 1.0450 and 1.0360 (200 day MA)?

?CAD - The Canadian Dollar is back in a familiar spot, underperforming once again as the only major currency that is weaker versus the US Dollar this morning. You can try and blame lower oil, but NOK is up on the session so its hard to pin CAD weakness on crude. I think it is more likely general nervousness ahead of tomorrow's BOC announcement, maybe fears the BOC will signal a pause??

I personally think they will pause after tomorrow, but I do not think they will signal that in the statement or the press conference. It is too early in the game and I think Macklem will want maximum flexibility/optionality moving forward. We know he has flagged a weaker currency as an inflation driver and he can't be happy with the recent moves in USDCAD. Signalling any kind of pause will just make it worse. I think it is 25bps tomorrow and probably a still hawkish sounding Bank of Canada. The employment data has been decent lately and wage growth remains strong (CAD wage growth was higher than the US last Friday if I recall). I think the BOC will pause, but that is a discussion for late January after more data for now it is 25bps and a still hawkish message. Macklem will keep up the moral suasion even though he knows that the time for rate hikes is ending as individuals are more sensitive to interest rates than ever. So far last week's 1.3646 high has held, we should see more resistance between 1.3685-1.3700. On the downside 1.3400-10 is the obvious big support level.?

?Good luck. ?