Today's FX Comment

October 28, 2024?

Good morning and happy Monday, I hope you had a nice weekend. I heard on the radio this morning that it snowed up in Sudbury last night. That is why I make it a point not to go north of Parry Sound after Labour day....

We kick off the week with risk sentiment on a bit of an upswing. Who would have thought: Israel attacks Iran over the weekend and oil is 6% lower, and stocks are set to open higher. A buy rumour/ sell fact moment (or sell rumour/buy fact depending on how you look at it) as Israel's strike steered clear of nuclear facilities and oil fields.

Asian equity markets were all higher overnight led by a 1.8% gain in the Nikkei. I thought political uncertainty was not a good thing for stocks but the market doesn't seem to bothered by the result of the Japanese election over the weekend. The ruling LDP party and its coalition partner Komeito lost their majority in the lower house of parliament elections and now speculation is mounting over PM Ishiba's resignation. Bad call to take over the LDP and call that election, Ishiba may set the record as Japan's shortest serving PM. Elsewhere, China better hope its recent stimulus starts to make an impact soon. The data out over the weekend was not all that encouraging with Industrial Profits for September declining 27% YoY.

European indices started out higher but gains have slipped away as the session has progressed. Maybe the market is getting more and more worried about those possible Trump tariffs? Over the weekend we heard the former President must that he was thinking about getting rid of income taxes and replacing it with tariffs. Of course, in the real world I think most would agree that it would be impossible to accomplish that task. Reviving Trump Taj Mahal or Trump University might be more likely.

Futures point to gains on the open in North America, no doubt a bit of a relief rally given how things played out in the Middle East over the weekend and Iran's talk of a "measured response". Buckle up though, what an upcoming week or two we have ahead of us. The UK budget, a BOJ rate announcement, US Core PCE, non-farm payrolls as well as earnings announcements from Alphabet (Tuesday), Microsoft and Meta (Wednesday) and Apple and Amazon (Thursday). A heavy week to say the least. Then of course we are eight days away from the US election but it still looks like a close enough race that we might not be able to call a winner until a few days (weeks?) after next Tuesday. Strap yourselves in for some volatility.

FX thoughts:

JPY - The LDP party has more or less been in power in Japan since the mid-1950's but PM Ishiba's gamble on an election call has backfired and now what? Ishiba has said he will stay on but no doubt will have difficulty forming a government. The most likely outcome is a short term caretaker government and yet another election. The BOJ will stay on the sidelines this week but you can expect the verbal intervention to ramp up on a move higher in USDJPY caretaker government or not. Support 150.80, resistance 153.990 and 154.55.

AUD - We'll see CPI data out of Australia Tuesday evening and while the headline print is expected to drop to 2.9% (inside the RBA's target band) it will be in large part due to government energy rebates (which will only have a temporary impact) core measures are expected to remain well above the CB's target at 3.5% and will keep the RBA on hold for the time being. The Oz is struggling at the moment and is trading just below support at .6620 this morning. I still like the Oz though, long AUDUSD via AUD Call spreads (give the trade time to play out) are worth a look.

EUR - The ECB's Wunsch said he is not seeing any urgency to accelerate the pace of easing, of course the market thinks otherwise and has a 50-50 chance of a 50bp cut priced in for December. News that Volkswagen is talking layoffs and 10% pay cuts amid plans for German plant closures isn't exactly a great sign for the EU economy, the ECB should probably just get going. Support is decent between 1.0755-75, on top it is 1.0870.

GBP - We will finally see the UK budget later this week and there is talk of widespread tax increases. That might not sound great for the UK economy but it is being counter-balanced by talk of a rise in capex/infrastructure spending. I do think that in the end, a more fiscally responsible budget is a big plus for Sterling. 1.3040-50 is resistance in Cable.

CAD? - Last week BOC Governor Macklem said we are still not close to the limit of divergence with the US, so maybe another 50bp cut in December has become more likely (I have thought all along we would be getting one anyways). I think a more aggressive BOC path is exactly the right thing to do, everyone knows rate cuts are coming, get them over with more quickly and the faster the economy can rebound and the greater likelihood of ending up with a higher terminal rate. For now the thought of divergence along with Trump trades and broader US Dollar strength is putting upward pressure on USDCAD but CAD bears need to be cautious, IMM data shows CAD short positions are being piled into and positioning is starting to look rather stretched. USDCAD is up over 450 points from the September 25 1.3420 low, that is a pretty sharp move in a relatively short period of time. Last I saw Canadian employment data this month was stronger than expected and retail sales were rebounding. As a wise friend said: "things always look most bid at the top..." Next topside level is the August 1.3946 high.

Good luck.