Today's FX Comment

August 18, 2023

Good morning and Happy Friday. Is it me or has it been a long week? The S&P is down just over 2% on the week (so far) which really isn't that much but the seemingly endless stream of bad news out of China makes it feel a lot worse. The fact that the Blue Jays have dropped four out of their last six isn't helping either!

Today is no different than any other day this week, more bad news out of China. Here are a few headlines:

- Evergrande (a blast from the past) has filed for Chapter 15 bankruptcy in New York to protect itself from creditors while it restructures debt (to be fair the move was not totally unexpected)

- Xpeng a Chinese electric car maker posted a record quarterly loss (I guess its not just the real estate market where you can find bad news)

- China’s State Developers are warning of major losses as contagion fears spread with reports that 18 of 38 developers reported losses in the first half of this year

- news that that investors in Zhongzhi Enterprise Group's wealth management products have received visits from the police who have requested (ordered?) them to not cause problems and avoid public protest

Given all that it's no wonder Asian indices (except Australia which made tiny gains) were all lower overnight with the Hang Seng entering a bear market and now down close to 21% from its January high.

Authorities are trying to stop the bleeding with Chinese banks ramping up their selling of US Dollars and the PBOC setting the Yuan fix today 1059 pips better than estimates (reportedly a record spread). There were also headlines about Chinese authorities telling tech firms to buy back shares in an effort to prop up the market and boost confidence. All of this seems like a band aid solution doesn't it? I sure won't claim to be a China expert but I think almost anyone would agree much more forceful measures are needed. Maybe it can start this weekend with cuts to the 1 and 5 year loan prime rates? The market expects 15bp reductions to both tenors to 3.4% and 4.05% respectively but what is that?going to do, you need to have much larger rate cuts to be impactful. China's PPI is running at -4.4% YoY, CPI is sitting at -.3%, time to pull a page from the playbook of Western CB's and cut rates aggressively - maybe 100bps to start? Until China unleashes heavy stimulus the bad news will keep piling up.

Concern over China is dominating everywhere with European equity markets all in the red while futures point to losses on the open in North America. The market is concerned about the Chinese economy, probably a bit nervous ahead of Powell at Jackson Hole next week and we know that seasonality does not typically favour equities in September. Right now the path of least resistance remains risk reduction and lower equities, after all the S&P is up +13% YTD and Nasdaq 34%, why not take some chips off the table. What can turn sentiment around, obviously major stimulus out of China and/or Powell sounding just a little bit dovish next week and signaling a pause (while no doubt reminding us rate cuts are a long ways away). Warning signs are flashing in a lot of places, China's economy and the impact on global growth (surely that will also help further dampen inflation everywhere), US banks under a downgrade watch, yields hitting levels last seen in 2008 globally (an ominous sign), US mortgage rates hitting 8%, US personal savings set to run out in September, the list goes on. Powell does not need to be hawkish at this point....

FX thoughts: Pretty simple right now, softer risk sentiment, lower equities, and flight to safety all three continue to support the US Dollar in the short term.

JPY - Japanese CPI came in as expected overnight which means inflation ex-food and energy ticked higher to 4.3% YoY. Of course the BOJ remains unbothered by it all but at some point does leaving the target rate where it is pose some risk to their credibility? At any rate risk off today has helped the Yen strengthen and of course we remain in the potential intervention zone so US Dollar longs need to be cautious. Resistance 146.50, support 143.55-75.

AUD - China sneezes and AUD catches a cold. Risk off almost always means a lower Oz and risk off on the back of China woes are even more impactful. The Oz is trading right on support at .6390 this morning, next downside level looks to be .6360. When China unleashes real stimulus (if they do) AUD will be a buy until then the market will likely keep selling rallies.

GBP - The UK economic data has been outperforming and has confounded UK bears, until this morning with a weaker than expected retail sales print. Now the market is wondering if this is the tip of the iceberg and the start of softer data (I think it just might be). The BOE will have to keep hiking and remain more hawkish than the Fed but more and more I think the market will start to focus on the inevitable economic slowdown those rate hikes will bring. 1.2620 (100 day MA at 1.2628)) is good support, resistance 1.2810-20.

EUR - ECB Chief Economist Lane noted today that he saw a number of reasons to believe the European economy would grow over the next couple of years, his statements didn't help the Euro all that much though as the market remains focused on the impact the slowdown in China will have on EU exports. We are right on support near 1.0870 this morning while the 200 day MA comes in at 1.0791 and should be a major level.

CAD - Risk off/weaker equities will always weigh on the Canadian Dollar but at the moment when you look around CAD is one of the better of a not so good lot. Canada remains less tied to China than many others and of course is far more tied to the US whose economy seems to be holding up pretty well (for now at least). Right now you can argue its "buy North America". Let's not forget oil has come off its recent highs but remains about 18% higher than where it was at the end of June. For now it is all about broader moves in the US Dollar and equities but stocks will eventually stabilize and when they do, USDCAD will be a sell. We should find offers all the way up to 1.3600.

Have a great weekend.

Good luck.