Today's FX Comment

September 1, 2023

Good morning happy Friday, happy September and happy NFP day. Meteorogical note: while much of North America suffered under record heat this summer, Toronto went the other way and did not have one single day above thirty degrees for the entire month of August. Of course it figures, now that September has started and people are returning to work and school the forecasters are saying we will exceed that temp five out of the next seven days (I’ll believe it when I see it).

The weather is not the only thing heating up, despite a little late day, month end swoon yesterday the S&P has been up four out of five days post-Jackson Hole climbing 3% over that period. A market friendly NFP print somewhere in the neighbourhood of 120-180k should see that rally extend into September.

Ahead of today's NFP release risk sentiment is doing just fine. Asian indices were mostly higher overnight (Hong Kong was closed) likely helped by news yesterday that major Chinese banks did in fact cut deposit rates and that the PBOC did indeed cut rates on some existing mortgages effective September 25th as rumoured. Things improved further with China's Caixin PMI data beating expectations and returning to expansionary territory with its biggest print since February of this year. Do the PMI beats this week point to China's economy slowly turning a corner? Not saying things will improve rapidly but maybe the worst is in the past. In the meantime, the PBOC also cut the Forex reserve requirement ratio by 200bps to 4% no doubt hoping that these FX reserves will be used to buy CNY, we'll see if that happens or if China's banks continue to hang on to foreign currencies. Of course, Chinese authorities might give strong hints that they prefer US Dollars to be sold.

European equities are trading higher this morning as well ignoring some less than stellar PMI data out of the Eurozone. Better data out of China has helped as has more dovish sounding central bankers from the ECB and BOE. The fact that manufacturing PMI data out of Spain, Italy, France and the EU all missed to the downside and remains well into contractionary territory (Germany is even worse) has market paring rate hike bets. Futures point to a higher open in North America but we know that can change at 8:30 ET with non-farm payroll data. Best guess:

120k-180k = Goldilocks, employment is slowing but still positive, Fed on hold, risk on

180k-220k = Fed probably won't go in September, but the likelihood of a November hike increases, Dollar up, stocks wobble

50k-120k = weaker US Dollar, stocks might not rally as fears of a harder landing hit the market

sub 50k - hard landing fears, stocks down, does the US Dollar bounce on risk off or decline on Fed rate cuts being priced in

above 220k - risk off, Fed has more work to do, higher US Dollar

FX thoughts: all about broad US Dollar moves post-data

JPY- It was reported overnight that Japan's major five banks will be raising housing loan interest rates from (get this) 0.1% to 0.2%. If you can't spur growth with rates that low you're in trouble. At any rate I think FX intervention remains a real possibility and that Japanese officials will not wait until 150 to do it. All about US yields post-data today. Support 143.75, resistance 146.50.

AUD - The better news out of China should be giving the Oz a lift this morning but resistance at .6480 has been sticky. Next topside level is .6540, support .6360. All about risk sentiment and equity market performance today.

EUR - All of a sudden the European data is looking worse and all of a sudden a number of more hawkish leaning ECB members are sounding a lot more patient. Odds of a September ECB hike are declining and that is continuing to weigh on the currency. With core inflation running at 5.3% I think Lagarde has one more rate hike in the cards. Support ahead of 1.0800 resistance 1.0930.

GBP - The UK's nationwide house price index slid more that expected this morning by -5.3% YoY the lowest since 2009 and I never like to compare anything to 2009.? Like the ECB, the BOE is starting to sound a bit more patient (its not about how high the terminal rate goes, but how long rates remain restrictive) that may benefit the UK economy and Sterling in the long run, but right now it is weighing a bit on the Pound. All about risk on or off post-data.? Support 1.2651 (100 day MA) followed by 1.2540, resistance 1.2780.

CAD - No surprise it is all about the data and broader US Dollar moves today. One thing I should note is CAD will likely outperform on the crosses give the ongoing rally in crude and the fact that the BOC has remained on the sidelines while other central banks are sounding more dovish. I would say this: USDCAD hit a low of 1.3093 on July 14 since then, the S&P is more or less flat as is the CAD/US two year yield spread while WTI has bounced almost $10, I'm not sure against that backdrop USDCAD should be over 400 points higher on a 1.35 handle....This currency pair always looks offered at the bottom and as an old colleague of mine would say most bid at the top. A softer NFP print (if we get one) might just lead to an outsized move lower in USDCAD. Support at 1.3500 followed by the 200day MA at 1.3463. Resistance 1.3580-1.3600.

Have a great long weekend.

?Good luck.