Today's FX Comment

June 22, 2023

Good morning. The theme of the day: central bank rate hikes. So far we have seen rate increases from Turkey, the SNB (25bps as expected) and larger than expected 50bp moves from the Norges Bank and the BOE. To put things in perspective, core CPI is running at 6.7% in Norway and 7.1% in the UK so hikes to 3.75% and 5% respectively seem long overdue.

Markets in Hong Kong and China were closed so volumes were definitely lighter in the Asian session and equity markets were mixed with indices in Australia and Japan (finally) lower. Risk sentiment remains under pressure in Europe this morning as well with equity markets all trading lower. I suppose a slew of central bank rate hikes and higher yields will tend to put pressure on equities. So do rumours that Russia plans to attack the Zaporizhzhia nuclear power plant I would guess. ?

Futures point to a lower open in North America as we await day two of Powell testimony but really is anyone expecting any Earth shattering today from the Fed chair? I don't think so. He really didn't offer anything new yesterday and likely won't again today. I think at this point the Fed is truly data dependent and I still have a hard time seeing them hiking next month if (big if?) we see headline CPI slide down to a mid-3 handle. We'll see. At the end of the day a few things do seem sure: inflation is stickier almost every where, a number of central banks have waited too long to hike rates aggressively and have made their job harder and rates will likely have to stay a bit higher for a bit longer in most places.

FX thoughts: No matter how they try to frame it or what they try to call it, the Fed has paused. In the meantime, a number of other central banks continue to hike and have more work to do and I think that will keep some pressure on the US Dollar moving forward.

JPY - Every central bank seems to be hawkish and hiking rates, except the BOJ. The contrast is very apparent and until we see a policy shift in Japan it will likely be difficult for the Yen to have a sustained rally. I (along with a lot of other people) underestimated BOJ Governor Ueda's dovishness but I do think inflation will be stickier than the BOJ forecasts and still think we may see that tiny policy shift in H2. The Fed has paused and various Japanese officials have started the verbal jawboning about the currency. I would be careful about getting caught long USDJPY up here. Resistance between 142.25-40.

AUD - No change here, the RBA has more work to do and I still like buying dips in the Oz. The bind that the UK and the BOE finds themselves in (too high inflation of course) should be a cautionary tale for central banks everywhere and should serve as a warning to the RBA: inflation won't magically drift lower on its own. A rebounding housing market, low unemployment, rising wage growth and rising inflation expectations. The warning signs are flashing and the RBA will keep raising no matter what their minutes say about "finely balanced" decisions.?Support between the 100 and 200 day MA's (.6692-.6717).

EUR - The ECB is hiking next month and I think it is likely they go again in September, in the meantime the Fed has paused and as we have noted previously that should help to support the Euro. We have re-visited the 1.10 handle and now the target has to be the recent triple top at 1.1090-95.

GBP - The BOE surprised with a 50bp rate hike this morning which is the right thing to do. They have dragged their feet for too long and have allowed inflation to start to slip away on them. Today's move helps, the problem is it is not enough and I'll say it again, the BOE will have to hike the UK into a nasty recession to get inflation under control. After a brief spike post-announcement, Cable has turned lower as the market realizes that stagflation and a potential recession are nothing to cheer about when it comes to Sterling. I like GBP Puts. Resistance 1.2875.

CAD - The Canadian Dollar seems downright boring given all the central bank action we have seen this morning but it is continuing to consolidate recent gains with USDCAD probing lower overnight. Right now CAD has the following going for it:

- healthy data (yesterday's retail sales print)

- stable oil price (OPEC+ support/the slow trickle of China stimulus)

- supportive CAD/US two year yield spread (remains near the best levels for CAD since last September)

- potential month end flow (US Dollar selling into month end/quarter end given equity market performance?)

- positioning > probably most important, it sure does feel like the market is caught short CAD and USDCAD will be offered on any bounce for the time being, at least until we see next week's CPI print.

To me it is all about next week's inflation data and here's the thing, yes core might remain sticky but base effects should kick in and that YoY headline CPI print should slide significantly (like it will for the US next month), CB's may focus on core but the news cycle focuses on headline and will the BOC hike next month with headline dropping to 3.5%? I don't think so personally. I am thinking we should see very good support around 1.3080 and we are likely heading into a new range, call it 1.2950-1.3500.

Good luck.