Today's FX Comment

September 11, 2024?

Good morning and happy hump day. I got home from work last night and thought I would just enjoy a relaxing evening. Lo and behold, when I walked in the front door there was a huge box waiting for me. My wife had ordered our daughter some sort of desk/makeup vanity and my job last night wasn't to take it easy but to become Bob the builder and put it together. If you have ever assembled anything from Ikea, trust me that is easy compared to wherever Wayfair found this thing. I managed to get to page 23 out of 39 pages of instructions. Really looking forward to heading home after work tonight to finish off the job. I did have the Presidential debate on while I was working and Donald Trump looked like he was having about as much fun as me last night....

The votes are in and it seems the majority feel Kamala Harris came out the winner in last night's debate. This morning the headlines say "Trump Trades are performing poorly" but I wouldn't get too worked up about things. First of all, it is only one debate and winning a debate doesn't mean winning an election (and of course Trump came out last night and said "I think it was the best debate that I have had"). Second (and I don't want to get too political here) equities have done just fine under the Biden administration. Regardless of who becomes President, I'm not sure either party will control the Oval Office, the Senate and the House so we'll likely be in for some type of political logjam making sweeping changes/reforms a challenge. For the market, it is more about the Fed and whether or not they can engineer a soft landing over the next 12 months anyways.

Overnight, Asian indices all finished the session lower. Some hawkish comments out of the BOJ weighed on the Nikkei and let's face it, no matter who the next President is, relations between China and the US will likely remain rather strained. Reports out of China that mortgage rate reductions will likely not be large probably weighed on sentiment as well.

European equity markets are in a decidedly better mood this morning, probably because Kamala Harris fared well in last night's debate, easing fears around potential Trump tariffs. Futures point to a slightly lower open in North America ahead of today's US CPI data. Given the Fed now seems more focused on the employment component of their dual mandate I'm not sure how much today's print moves the needle. Expectations are for the headline number to come in at 2.5% YoY (down a fair bit from 2.9% prior and a three+ year low). We all know the Fed will be cutting this month, it is just a matter of 25 or 50bps, a hotter print today won't derail that cut, but maybe a softer number tips the scales toward 50bps? Maybe a 2.4 or 2.3% YoY headline number does the trick? With the market pricing in about 32bps of cuts for this month's meeting, a weaker print would be more impactful than a stronger number.

FX thoughts:

JPY - USDJPY is a sell on rallies, not a buy on dips. We were reminded of that this week when the pair traded up to resistance at 143.70 before getting hammered down last night on some hawkish sounding BOJ comments. Normally dovish leaning BOJ member Nakagawa reiterated that rates will increase if the central bank’s outlook is met.? She went further and stated that real rates are at an extremely low level. The BOJ will be hiking while the Fed will be cutting, that will continue to weigh on USDJPY moving forward. 143.70 remains the sell zone, support 140.80 followed by last December's 140.25 low. You know we'll take a peek at a 130 handle sooner rather than later.

AUD - Broader based US Dollar weakness has given the Oz a boost this morning but overall no change here. The market is still looking for an RBA rate cut that won't be coming. .6610-20 would be the buy zone while .6800 is the key topside level.

EUR - Euro remains in a holding pattern ahead of the ECB tomorrow, a rate cut is all baked in so it will be all about what the takeaway is regarding forward guidance. Bids ahead of 1.1000, resistance 1.1090 and 1.1155.

GBP - We saw the first softer UK data in a long time this morning with weaker than expected GDP as well as industrial production prints. It hasn't hurt the Pound though as broader US Dollar weakness has lifted Cable this morning. I don't think it changes anything for the BOE either, it is still another hold next week. Inflation remains a touch too high while employment and wage growth remain quite strong. Support 1.3060, resistance 1.3130 and 1.3220.

CAD - All about the US CPI print and broader US Dollar moves for USDCAD this morning. Governor Macklem spoke in London yesterday and opened the door just a bit to deeper rate cuts noting that it could be appropriate to lower rates more quickly if downside risk materialize. What more downside risks does the BOC need to see? As we noted yesterday, unemployment is at 6.6% (highest level in about seven years excluding the Covid period), GDP flat in June and July, two straight months of negative retail sales, the weakest GDP per capita in the G7 and to top it off,? the Canadian economy has created a grand total sum of 16,000 full time jobs over the last six months. The economy is certainly not firing on all cylinders. Let's not forget inflation has been falling steadily, CPI ex-mortgage costs sits at 1.9% YoY and the three rate cuts we have seen to date have certainly not set the housing market on fire. The BOC at 4.25% just seems too high in my opinion but they won't let themselves get too far in front of the Fed. Support at 1.3520, there were offers above 1.3600 yesterday and I expect them to be stacked up there again today anywhere from 1.3610-40.

Good luck.

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