Today's FX Comment

May 9, 2023?

Good morning. The Leafs get an extra day off which is a good thing, maybe Samsonov can come back with some added rest. The Oilers-Vegas series in the meantime was the exact opposite of the previous game with the Oilers ending up on the wrong side of the 5-1 score last night.

Kind of like the market, yesterday we started the session with a risk on feel, today it is the opposite and feels more like risk aversion to start the day. Continuing with the opposite theme...Yesterday in Asia, the Nikkei was the only market that traded lower, today it is the only one in the green with the rest of Asia weaker across the board. We saw Chinese trade data overnight, on the plus side exports beat expectations so maybe the global economy is holding up, on the downside imports were very weak which says that maybe China's economic rebound is evolving more slowly than previously thought. European indices are all in the red this morning and I don't think there is any one specific driver. Let's blame it on the softer Chinese import data and the fact that the BOE is set to hike this week and that the ECB is still talking hawkish. Perhaps concerns are growing around the European economy - for today at least.

Futures point to a softer open in North America as we wait for this afternoon's meeting between President Biden and the congressional leaders. Treasury Secretary Yellen is sticking to her "we're out of money by June 1st" call and I think headlines around today's meeting are serving as a reminder to the market that the deeply partisan politicians have 23 days (maybe) to come to some kind of agreement. I do not think the US will default as cooler heads will ultimately prevail, but I wonder why it always seems to come down to the last minute. It makes for a shaky risk backdrop to say the least.

One more thought on yesterday's senior loan officer survey. Tighter credit and weaker business loan demand was seen in Q1, banks expect to tighten standards across all loan categories over the rest of 2023. Q2 will only get worse, the Fed is on hold.

FX thoughts:

JPY - Yen is marginally stronger this morning, weaker equities/risk off helps as does a slightly lower US 10 year yield. BOJ Governor Ueda reiterated the view that if 2% price target was met in a sustainable manner, then the BOJ would end YCC and shrink its balance sheet. CPI is running at about 3.8% and as we have seen pretty much everywhere around the world, inflation is stickier than anyone previously believed it would be, it might just be the same in Japan. You know a shift is eventually coming. Support 133.50.

AUD - The Oz is weaker this morning with the Chinese trade data and softer equities weighing however the currency is still hovering above the 200 day MA (.6727) which is initial support. Australia's fiscal year 2022-23 budget is said to record its first surplus in 15 years, sounds mildly positive. I think the RBA will have to hike again and I think Chinese import data will bounce back with Australia being a big beneficiary. Overall risk sentiment always matters here but I still like buying dips.

GBP - A 25bp rate hike is all priced in for later this week so it will be all about whether the market judges it a hawkish or dovish increase. With headline inflation still in double digits you would think the central bank should be hawkish sounding but the BOE has been somewhat erratic since their rate hike campaign began and have hiked rather reluctantly at times so don't bet on it. 1.2635-55 remains a decent resistance zone and we'll see if we can close above this week but I wouldn't bet on an overly hawkish sounding BOE.

EUR - Various ECB members still sound hawkish:

Kazaks - still have some ground to cover, doing too little remains the greater danger

Kazimir - ECB in a position to go higher for longer

But the market has heard the hawkish talk before and I think is getting tired with the Euro constantly failing on a 1.10 handle. Nearby support at 1.0940 but maybe we need a move down to 1.0830 to clear out stale longs?

CAD - Weaker equities + weaker oil = weaker Canadian Dollar but it's impressive we are still trading (barely) on a 1.33 handle. We did see some US Dollar buying yesterday as the market continues to play the broad 1.3250-1.3850 range (and really 1.3300-1.3700 covers it for the most part) and I would guess IMM short CAD positions have been trimmed back further at this point. Still I would say this, the market doesn't feel like it is long CAD and while I don't think the BOC will hike again the wage growth we saw in Friday's data has to keep a potential hike on the table. Overall risk sentiment and equity market performance remains a key driver and I think the range will continue to hold but it feels like it might be shifting a bit lower with 1.3530 a good sell zone now.

Good luck.