Today's FX Comment

September, 29, 2023

Good morning. Let's see, Blue Jays try to clinch a wild card spot, NFL all day Sunday plus the Ryder Cup has kicked off. A1 sports weekend coming up…..

As Q3 draws to a close risk sentiment is rebounding, a nice way to head into the weekend. Over the last few weeks the market has been filled with a lot of angst over the theme of higher rates for longer but looking back at Q3, we managed to come through things relatively unscathed. Yes the S&P is down about 3% this quarter (all in the last two weeks) but the index is still up 12% YTD and I'm not sure many of us thought that would be the case when we started the year.

September has historically been the worst month for the S&P so can we really complain? History told us it was coming. History also tells us that October and November are pretty terrific months for stocks, over the past five years the SPX has averaged gains of 1.45% and 4.1% respectively in October and November, over a ten year span the returns are 2.26% and 3.2% and stretching it out to twenty years you're still looking at average gains of 1.3% and 1.76%.

Past performance does not guarantee future returns but everyone knows that October and November are normally good performance months for equities and we know this can often turn into a self-fulfilling prophecy. I don't think a US government shutdown has a profound negative impact on stocks, if anything it may cause the Fed to be more patient and pause given the uncertainty (especially if the data isn't released). Seasonality on your side plus a Fed pause, maybe it's time to dip your toe back into the equity market.

Overnight Asian indices were mostly higher with the Hang Seng seeing the biggest jump (maybe some short covering heading into the weekend). Chinese markets will be closed for holiday through October 8th but this weekend we will get some key PMI data to help gauge the health of China's economy (Caixin PMI). In the meantime the WSJ reports that China's Foreign Minister Wang YI could visit Washington DC ahead of potential Xi Biden summit in November. Given the current state of geopolitics I think a Xi-Biden meeting would be a great thing and very welcomed by the market. Better communication is not a bad thing.

European indices are all in the green this morning cheered by more soft inflation data out of the Euro zone. The EU flash CPI number came in well below expectations at 4.5% YoY (down from 5.3% the prior month). Like I said yesterday, the softer CPI print takes some of the "flation" fear out of the dreaded stagflation word. Looking more and more like we have seen a peak ECB rate. Futures point to gains on the open in North America but we know there could be some residual month end flow at play and of course we have the Fed's preferred inflation measure Core PCE later this morning. The number is expected to decline to 3.9% YoY from 4.2% prior and I think an as expected print will keep the market happy, a softer number and the market will really heat up heading into Q4 (I don't want to think about a stronger print). Regardless, I think the Fed is on hold. I also think we should remember this: the "Table Mountain" approach to interest rates means rates remain moderately high for some time rather than escalating rapidly and then dropping quickly. Get used to that, I think we'll hear more "table mountain" type talk in Q4 rather than rate hikes.

FX thoughts:

We could still see a little month end flow today and of course PCE will be impactful as well. Maybe if equities have a solid run over the next couple of months + Fed on hold = weaker US Dollar?

JPY - Japanese officials are still closely watching FX levels but the market is tired of hearing about that. It feels like the market will push USDJPY higher testing to see where the intervention point is and when the BOJ does intervene (and they will) it will be the usual nasty, fast move lower. For today all about US yields post- PCE data.

AUD - The Oz has weathered the storm of poor equity market performance and concern around China's economy quite well and looks set to re-test resistance at .6520. .6360 remains very good support and if equities can get on a roll .6620 is the next topside level. We have talked about long AUD Call spreads this week, I think they still work.

EUR - French CPI actually declined by -.5% MoM and alongside softer Eurozone CPI as a whole is welcome news for the Euro. It means fewer ECB rate hikes and less potential damage to the EU economy. We did warn about getting caught short near 1.0500...next topside level is 1.0670.

GBP - Some good news for the UK as the final Q2 GDP reading was revised higher with Q1 also revised higher. Press reports also note that banks are announcing mortgage rate cuts, no doubt welcome relief for UK consumers.? I still find it hard to be anything but bearish here but if the broader US Dollar comes under pressure Cable will bounce. Maybe time to trim back short Sterling positions.

CAD - Canadian GDP up in a few, recall last month's data was very soft so I am sure people are looking for a bit of a rebound here today. A soft print this morning and the market will quickly start to price out an October BOC hike. The market should do that anyways, the BOC is done hiking already. Support 1.3385, resistance 1.3510, watch for a close below the 200day MA at 1.3458 today.

Have a great weekend.?

Good luck.