Today's FX Comment

September 6, 2023

Good morning, happy hump day and happy Bank of Canada day. Can you feel the excitement in the air, no not the BOC, NFL season kicks off tomorrow (take the Chiefs -5.5).

September not only brings the start of the NFL season but also typically the most challenging month for equities and that is on display again this morning with indices lower across the board in Europe and futures pointing to losses on the open in North America. Take heart though, if you can get through September, October and November tend to be two of the best performing months for the S&P 500 over the last 5-10-20 years.

The overnight action really kicked off in Asia with the BOJ (verbal jawboning) and the PBOC (fixed USDCNY at a record 1139 pips stronger than market estimates 7.1969 vs. 7.3108/more state owned bank selling of Dollars) doing their best to stem the US Dollar tide and strengthen their respective currencies. Equities were mixed and once again there is a growing expectation of further stimulus to prop up China's real estate market (tell me if you have heard that one before) with the China Securities Times noting in a front page commentary that China should end unnecessary home buying curbs. This in turn helped push the stock price of companies like Sunac, Evergrande and Country Garden anywhere from 14-68% higher on the day. The Hang Seng was down about 2% at one point but managed to get back to flat on the day while the Shanghai index finished a little bit higher.

Sentiment turned more downbeat in Europe though with equities firmly in the red. A couple of ECB members noted the inflation fight was still on and sounded more hawkish overnight and at the same time German factory orders fell off a cliff and of course that brings up the dreaded stagflation word once again. Higher energy prices also remain a concern for Europe and as September kicks off thoughts slowly turn toward winter. Last year Europe enjoyed a very warm season which helped to avert an energy crisis, will they be fortunate once again this year?

With futures pointing to a softer open in North America US yields have eased a tiny bit and that combined with the overnight action from the BOJ and PBOC has helped soften up the US Dollar. As for equities, everyone knows September is typically not a great month and I would guess the market is positioned defensively, maybe a softer US CPI print next week (if we get one) will allay some market fears. One way or the other, the Fed will take a pass this month and I think it is likely they are done for good. After an aggressive rate hike campaign, the time has come to be more patient, why:

- China is in a slump, CPI -.3% YoY, PPI -4.4% YoY and they will be exporting disinflation around the globe

- Europe is inching closer to a recession, and while the US economy looks great in comparison it is not an island, if China, the EU and UK are slowing the U.S. won't be far behind

- student loans re-starting in October will dent disposable income and slow spending

- bankruptcies are rising, "The number of commercial bankruptcies increased nearly 17% in August compared to July…..That marks the 13th consecutive month that total bankruptcies, including families and individuals, have logged year-over-year increases, according to the American Bankruptcy Institute."

- US labour force participation rate rose this month, unemployment rate jumped from 3.5 to 3.8% and let's not forget payrolls has been revised lower for the last 7 months straight, employment is decent but not as strong as previously believed and cracks are maybe slowly starting to show

- stress remains on parts of the US banking system

Caution lights are flashing, Powell has stated previously that he won't try to "crash" the economy with interest rate hikes and I think now is the time to give that some serious thought and consideration. Pause button pressed (but he won't admit it).

FX thoughts:

JPY - Long USDJPY positions have been warned, verbal intervention continues but the language has become more forceful with Japan's top currency diplomat Kanda noting that moves in USDJPY were becoming speculative and that officials would not rule out any options when it came to the Yen. I think the fact Kanda noted the moves were becoming speculative is important, Japanese officials seem fine with moves based on fundamentals but speculation is a red line. One step closer to real intervention, of course that might drive USDJPY down to 140 but for a real sustained move lower the BOJ has to become less dovish. Worth a look at a USD Put spread up here I think. If you want to keep your long USDJPY position sell some topside against it to generate premium. 146.50 is initial support, resistance 147.80 and 148.40.

AUD - Australian GDP surprised to the upside (YoY) overnight and that combined with hopes of more stimulus out of China have halted the selloff in the Oz. Decent support remains at .6360 but we'll need real, concrete stimulus out of China for a more sustained bounce.

GBP - Inflation remains far too high, the economic data is wobbling and the BOE will likely end up hiking the UK into a recession. Hard for me to be anything but bearish here.? Once again, right on support this morning at 1.2540, next downside level is 1.2485 followed by the 200day MA at 1.2425.

EUR - The ECB’s Knot noted this morning that the markets might be underestimating the upcoming September rate decision and I think he is right, with core inflation still running at 5.3% another hike should probably be in order. His comments helped boost the Euro but recession/stagflation concerns lurk in the background and the data has been so poor lately that it feels like the market will keep selling rallies here for the time being.? Support right here at 1.0730 followed by 1.0670.

CAD - It is Bank of Canada day but no one expects them to do all that much...The market is pricing in zero chance of a rate hike and with no MPR nor press conference today we'll be left to parse through the statement for signals on future direction. Who is kidding who though, the BOC is done and dusted when it comes to rate hikes. Unemployment has ticked up to 5.5%, last week's GDP print was soft and we all know mortgage interest costs accounted for 30% of the jump in inflation last go round. Why hike if those increases are helping to fuel inflation (especially when 20% of Canadians are seeing their mortgage balance increase each month at this point - real estate is far too important to the Canadian economy to have it crash). We'll get more from Governor Macklem when he speaks tomorrow but I would expect the Bank to remain "data dependent" at this point and keep the threat of another rate hike hanging over Canadian's heads but it won't happen. 1.3670 is close by resistance after that it is 1.3745.

Good luck.