Today's FX comment

July 6, 2023

Good morning, are we ready for the onslaught of US employment data over the next couple of sessions? It started with Challenger job cuts (not too bad), then a huge ADP print, next up jobless claims followed by ISM Services employment culminating with NFP tomorrow.

I think the mood this morning can be summed up in two words: risk off, for stocks at least. It is a sea of red for equities this morning but yields are higher, oil is a bit higher and in very un-risk off fashion the US Dollar is mostly lower to start the day.

Things did not get off to a good start in Asia overnight with indices lower across the board led by a 3% drop in the Hang Seng. As US Treasury Secretary Yellen begins her trip to China there are ongoing concerns about tit for tat trade restrictions starting with China's clamp down on the export of rare earth minerals (or starting with the US attempt to curb chip exports depending on your point of view I suppose) and the threat by the US to restrict China's access to cloud computing. Yellen has her work cut out for her on this trip convincing China that the national interests of the US (and the west) can co-exist with a prosperous, technologically advancing China.

A couple of more grey clouds out of China/Hong Kong this morning weighing on sentiment:

- yesterday it was reported that Chinese banks would be allowed to offer local governments?25 year loans (instead of the usual 10 years), today reports have been denied = rising concern about a credit crunch

- yesterday the Hong Kong Monetary Authority lent the largest amount of funds to banks through its discount window since 2021 which raised some eyebrows

It feels like the market won't be satisfied until we get a significant, comprehensive stimulus package out of China and at this point it sure doesn't seem like it will be forthcoming anytime soon. In the meantime the PBOC continues to lowball the USDCNY fix (7.2098 versus estimates of 7.2458 last night).

The flow of red ink has spilled over into Europe this morning with sentiment weighed down by Asia and by yesterday's Fed minutes which the market has voted as being "more hawkish". Really I'm not sure the minutes contained anything new, Powell has spoken several times since the last Fed meeting and I think we get it by now, the Fed has said that it is likely rates will have to increase further (I still think two more times is doubtful) and it will be higher rates for longer. That message has been repeated over and over, nothing new to see here in my opinion. North American equity futures are under pressure to start the day but I remain an optimist. The US and China will squabble but at the end of the day they need each other so the relationship will continue to have its rough patches but the two sides will ultimately find a way forward. As for the hawkish Fed, the market already has 22 bps priced in for this month and rates cuts have already been priced out for the remainder of the year. The hawkish Fed is maybe fully priced, especially when you think headline CPI likely prints 3% next week. Funny how the market works, 12-18 months ago everyone was buying into the transitory inflation story, now most everyone you speak to is buying into the sticky inflation story. A swing from one extreme to the other, the truth as always is somewhere in the middle and I don't think inflation will prove to be as sticky as a lot of people are thinking right now.

FX thoughts:

JPY - Recently, higher US yields has meant higher USDJPY but sot so today with the pair almost a big figure lower this morning. Call it a classic risk off move, call 145 an unofficial line in the sand for Japanese authorities and call it positioning with the market long and realizing that verbal intervention can get real very quickly. We have been saying if you are long USDJPY now is the time to be a bit cautious and pare positions back and we are seeing some of that this morning. Time to look (again) at downside USDJPY trades. Yen Call spreads work. Support 142.25

AUD - It is rare when the Oz can shake off weaker equities to trade higher and we are seeing one of those rare instances this morning. As we mentioned yesterday, despite tensions with the US trade relations between China and Australia have been improving and that helps the Australian economy. It also looks more and more like the RBA will be getting a new Governor and the thinking is that perhaps that leads to more rate hikes (definitely needed in the land down under). .6640 supports, I still think you buy dips and you can also look at AUD Call spreads to get long.

GBP - UK construction PMI data was weaker than expected this morning and dipped into contractionary territory. I guess no surprise with the BOE rate hikes to date and more in the pipeline. The data has had little impact though as broader US Dollar weakness has given Cable a lift this morning. Support 1.2635-55, we are through 1.2750 resistance, next topside level 1.2835. No change for me, I think the UK is ultimately in for a very hard landing and I prefer selling rallies.

EUR - A little bit of good news this morning with Germany factory orders soundly beating expectations which in turn has helped give the Euro a lift. Levels remain: support 1.0830, resistance 1.0975. I think the ECB hikes a couple of more times and look for a re-test of a 1.10 handle. Buy dips.

CAD - I have been looking for a peak above 1.33 in USDCAD and we got it overnight. You know how I feel, I do no think the BOC hikes next week and you know my reasons:

- last month's rate hike was (in my opinion) an "insurance hike" not the re-start of a string of increases

- two straight months of FT job losses

- soft SEPH survey (even accounting for the Federal government strike)

- excluding mortgage interest costs, CPI rose at a pretty tame 2.5% YoY in last month

- BOC already has the highest real policy rate among its major developed central bank peer set (nominal policy rate target less year-on-year CPI inflation)

I think it is time once again for the Bank to be patient, only a FT job print in excess of 50k tomorrow combined with 5% + wage growth would make me change my mind. The market has 14bps priced in, if/when the Bank doesn't go it should mean USDCAD higher, WHICH will be your chance to sell the bounce as a Fed hike this month is all but priced in and I think the Fed is done after that. Resistance 1.3315 followed by 1.3355.

Good luck.