Today's FX Comment

June 28, 2023

The Biden administration is considering tougher restrictions on AI chips and while that may be weighing a little bit on S&P futures this morning and may weigh on Nvidia or AMD it didn't really dent market sentiment too badly overnight. Asian indices were mostly higher after a solid handoff from North America with the Nikkei once again leading the charge (+2%). China's industrial profits data wasn't great but it is at least heading in the right direction (Y/Y: -12.6% v -18.2% prior), in the meantime China did little to strengthen the Yuan overnight but there are plenty of reports about China state banks preparing to ramp up their selling of the US Dollar.

European indices are all flashing green this morning playing a little catch up with yesterday's North American move. The ECB's conference in Sintra is ongoing and today is the big day with Powell, Lagarde, Ueda and Bailey all speaking on a panel. I suppose we could hear that inflation remains too high (except in Japan) and rates will have to increase and stay higher for longer (except in Japan as well). Of course, each central bank sets their policy rate at their own meetings so I'm not sure we'll hear any great promises being made today. Besides we tend to hear from multiple central bankers each and every day (especially from the Fed and the ECB) so in a way Sintra doesn't seem that special anymore. I mean for example the ECB, we have already heard from de Guindos, Centeno, Muller, Vujcic and Vasle today, I don't know how much there is left to say...

As we mentioned earlier, futures point to a slightly softer open but equities have been hard to keep down. The market was pretty bearish earlier this year and I don't think many predicted the S&P +14% YTD or the Nasdaq +36% YTD. That bearishness has turned into FOMO with people maybe chasing equities now. Month end/quarter end can be dominated by flow and rebalancing, the picture clears up in July.

FX thoughts:

JPY - I suppose the contrast between Japan's never ending easy monetary policy and the rest of the central bank's hawkishness will be on full display in Sintra today and for the time being the market continues to probe higher in USDJPY. Japan's top FX person Kanda reiterated that he is monitoring FX with a high sense of urgency and that officials would respond and take action if there were any excessive moves. The time to take action is probably drawing near, I don't think I would get caught overly long USDJPY heading into the weekend and next week's US holiday where liquidity will be lighter. Perfect time for maximum intervention impact.

AUD - We did say yesterday that last night's inflation data would be important for near term direction in the Oz and it was. It came in softer than expected and of course AUD traded lower. A few things to note: CPI at 5.6% YoY is still pretty hot and as Australia's Bureau of Statistics highlights: “It can be helpful to exclude items with volatile price changes from the headline CPI indicator to provide a view of underlying inflation...when excluding these volatile items the decline in inflation is more modest. The annual increase for the monthly CPI indicator was 6.4% in May, slightly lower than the 6.5% in April." So that core inflation data seems stickier and I'm not sure I would pop the "dovish RBA" champagne corks yet. Funny how the market views various central banks, at 5.6% the market thinks the RBA will hold next week, but at 3.4% the market thinks it is better than 50/50 the BOC hikes next month…I like buying the dip in AUD.

GBP - The US Dollar is enjoying broad based strength this morning and Cable is trading just above the support zone between 1.2635-55. You know how I feel here, the prospect of more BOE rate hikes helps to support the currency for now but more and more I think the market is coming around to the idea the BOE will have to hike the UK into a recession to beat inflation. Not a positive for the UK or for the Pound. GBP Put spreads are worth a look. Next support 1.2545.

EUR - I think we get it by now: the ECB is hiking in July and maybe September as well but that meeting is more data dependent. The market has about 38bps priced in over the next two meetings which makes sense. I stand by my call of no Fed hike in July and for the first time in a long time, the ECB might be more hawkish then the Fed. I think you buy dips in Euro. Support at 1.0830, resistance just ahead of 1.1000 the recent triple top around 1.1090 is the target.

CAD - We have all seen the headlines by now: "inflation hits two year low in Canada", and as I have mentioned many times previously I get that the BOC looks at core, but after a surprise rate hike earlier this month (which I would say was an "insurance" hike) and headline inflation dropping a full per cent to 3.4% (and likely moving towards 3% in the next release) the BOC will pause in July. The market still has 13-14 bps priced in for next month but eventually I think this drifts lower and as it does it should put some upward pressure on USDCAD. BOC = tightest real policy rate among the major central banks, time to pause and assess. Resistance levels: 1.3270 and 1.3315.

Good luck.