Today's FX Comment

June 7, 2023

Good morning, happy hump day and happy BOC day.

The Bank of Canada will take center stage in a couple of hours and with the market pricing in something like a 40% chance of a rate hike this morning there is some potential vol around the release but before we get to the Bank let's review the overnight session.

Asian indices were mixed with the Nikkei finally giving up some ground and underperforming. Sentiment took a bit of a hit on the back of weaker than expected Chinese trade data which saw exports fall by -7.5% YoY versus expectations of a -.4% decline. On the plus side imports were a bit better than expected (although they still dropped by -4.5%). I think at the end of the day the market has for the most part been able to shrug off the softer Chinese export data as it simply increases the odds of more stimulus faster. A support package for the property sector, a cut to the RRR, lower deposit rates and a relaxation of home purchase curbs are all in play for China.

European equity markets are mixed but overall are pretty flat. The Chinese data may have raised concerns around global growth and weighed on sentiment but it is more likely markets might be in a bit of a holding pattern to see if the Fed decides to "skip" next week. Futures point to a flattish open in North America and with a lack of data and the Fed in their blackout period the market may remain quiet overall ahead of next week's FOMC. With the debt ceiling out of the way and the Fed potentially pausing (sorry skipping) maybe the market slowly grinds higher?

FX thoughts: The BoC may hike today or may hike in July, the RBA is suddenly sounding hawkish, the BOE definitely has to keep on raising rates and the ECB probably has a couple of more hikes up their sleeve. In the meantime, the Fed may skip next week. Sounds like the US Dollar may start to come under some more pressure overall?

JPY - The BOJ remains the one central bank that stands out from the rest with Governor Ueda re-affirming once again overnight that easy monetary policy will be maintained until the 2% inflation target is sustainably achieved. With inflation running at 3.5% I guess it comes down to the definition of sustainable. I think inflation will prove to be stickier than the BOJ thinks (like it is everywhere) and policy will shift sometime in H2. As we noted yesterday, with the Fed potentially pausing next week and Japanese officials no doubt ready to ramp up verbal intervention above 140 I think it is worth getting short USDJPY up here. Support 137.80, resistance 139.90.

AUD - Long time readers will know we have been saying the RBA has a lot more work to do and until this week it seemed they did not want to admit it. It doesn't seem that way anymore starting with a surprise 25bp rate hike, a statement that removed the line "medium-term inflation expectations remain well anchored" and now a hawkish sounding Governor Lowe overnight who said "We have been prepared to be patient in getting inflation back to target but our patience has a limit and the risks are testing that limit" while reiterating some measures of medium term inflation are up strongly. Above target inflation, low unemployment, housing ticking higher, more rate hikes to come, buy the dip in Oz. We are trading right on resistance at the 200 day MA this morning (.6692) next topside target is .6800.

EUR - The ECB continues to sound pretty hawkish but the market is used to that by now and next week Lagarde will have to walk the walk (and talk the hawkish talk) for the market to get excited about another run toward 1.1000. Maybe the combo of a Fed pause + a hawkish sounding Lagarde will see the Euro push higher. Positioning should be cleaner now. Support 1.0665, 1.0830 is the next topside target.

GBP - Cable has made a push through resistance at 1.2440 this morning, supported by the notion of ongoing BOE rate hikes. Still bearish here longer term though. Next topside level is 1.2540.

CAD - The Canadian Dollar should take center stage in about two hours with the BOC rate announcement. Let me say I personally think it will be a hawkish hold this morning (as do 29 out of 37 of analysts/economists) but the rates market is much closer to 50/50 so expect some volatility around the release. I think for every reason to hike, there is probably a reason to be patient:

Inflation - Remains above target, core looks to be sticky but…it has fallen pretty steadily from a high of 8.1% last June and is expected to drop further this summer aided by base effects.

Unemployment - Remains near historical lows, but hiring is slowing.

Wage growth - Remains hot, or does it? As the newspaper La Presse reported earlier this week there is a significant divergence between the wage measures used by StatsCan, the Labour Force Survey vs SEPH. According to the LFS, weekly earnings in Canada have been rising at an annual rate of 5.6% for the past six months on average. The SEPH however shows that weekly earnings in Canada have been growing at an annual rate of only 2.5% since November and that this increase is slowing rapidly. For example, for the latest month available, March the annual increase is only 1.4% in Canada. Remember the SEPH is based on actual pay data provided monthly by businesses to the Canada Revenue Agency, not just a survey and is considered more reliable.

House prices are rebounding - They are, but you have to ask a few things is it simply some pent up Spring demand that will wane as the summer goes on? Can the BOC really do all that much about house prices at the end of the day when it seems to be a supply issue (500,000 new Canadians every year and we all have to live somewhere). Last thought: hiking rates means higher mortgage payments for Canadians (obviously) which simply feeds into the housing/shelter component of inflation and actually drives the number higher. If it remains in large part a supply issue, should housing be the BOC's focus or should they leave it to regulators?

So for every argument for a hike, there seems to be a counter point for the Bank to remain patient and with jobs data in two days, another employment report on July 7th plus a CPI release on June 27th all ahead of the July 12th meeting why not wait to see ow the data evolves. That being said, they surprised the market five times last year so we shouldn't be shocked by anything Governor Macklem does.

Best guess:

hike - a quick move toward the recent low at 1.3315, keep selling bounces as the market will start to expect another hike in July.

no hike - we bounce to 1.3450 quickly as algos pay up USDCAD then drift back down as the statement sounds hawkish and the market simply pushes the hike to July

Good luck.