Today's FX Comment

May 15, 2024

Good morning. Copper futures are hitting a record high and are up more than 7% this week. That means not only do we have to be wary of car thefts in Toronto but anyone doing a renovation better lock up their copper plumbing supplies good and tight. Copper pipe will be high on a thief’s wish list with prices where they are.

As we await perhaps the most hotly anticipated CPI release of the year (maybe the most anticipated data release of the year?) markets are in a pretty good mood. Yields are lower across the board, equities are mostly higher and the US Dollar is broadly weaker to start the session. Risk on ahead of a hugely important inflation number, what could go wrong?

Hong Kong was closed for holiday but Asian equity markets ex-mainland China were higher overnight. I suppose sentiment turned a bit negative on China after the Biden administration's official action on Chinese tariffs despite the move being well telegraphed. Response from Chinese authorities has been relatively muted thus far and I suppose we have to keep things in perspective, the tariffs apparently only impact about 4% of total US imports from China. The PBOC kept its 1 year MLF rate at 2.50% as expected but there was some potential good news for the Chinese real estate market with reports that the government is considering purchasing unsold Chinese homes in an attempt to ease the supply glut. This is very direct stimulus I suppose....

European indices are mostly higher ahead of today's US releases given a lift by a continued improvement in Eurozone data. Industrial production numbers were better than expected this morning and EU Q1 GDP preliminary readings continue to suggest the fastest growth since Q3 2022. Europe has come a long way from stagflation fears.

Futures point to a flat open in North America which makes sense ahead of today's all important inflation report (and let's not forget retail sales). Last month it was car insurance that was a big driver (pardon the pun) of inflation and its like a game of whack-a-mole, we don't know what will pop up this month to drive CPI. Let's keep an eye on the shelter component to see if it finally provides that long awaited disinflation the market has been looking for. I suppose it's fairly straightforward today, core CPI is expected at +.3% MoM, if it's on expectations or lower buy stocks and sell the Dollar, a higher print and do the opposite - but watch for revisions of course.

FX thoughts:

JPY - It is rare that we have been able to say this lately, the Yen is the top performer among the G10 this morning. We noted yesterday that the 10 year UST-JBG spread was at its lowest level since the beginning of April and that back then USDJPY was trading at 151.50. This morning that spread is even more supportive of the Yen and maybe the market is finally getting the message or maybe the market is worried about intervention or maybe its both. All about inflation and potential intervention today. Not much resistance on top ahead of 157.85, not much support until 152.

AUD - Australian wage growth data was a bit softer than expected last night but it is still running at 4.1% YoY, hardly disinflationary. All about broad US Dollar moves post-data today but it is clear the RBA will be one of the last CB's to cut rates and I think metals prices likely trend higher. Not a lot of negatives here at the moment. We are trading just above resistance at .6635 next level .6675, support .6550.

EUR - The Euro area data keeps improving and the ECB's Villeroy told us today that the economy is robust and that he expects a further recovery into next year. He also told us to expect a rate cut in June. A stronger economy plus rate cuts that support even more growth sounds like a good combo for the Euro. I think bids have likely been moved up to 1.0730, we are trading right? below resistance at 1.0840, next topside level is 1.0875.

GBP - I do not think the BOE can/will cut rates in June but for today, it is all about the US data, overall risk sentiment and broad Dollar moves for Cable. I see nearby resistance at 1.2640. A softer US CPI print this morning and we're firmly back in the old 1.2600-1.2800 range.

CAD - 1.3600-20 is very good support, but a market friendly inflation print today (if we get one) and a broader US Dollar selloff might finally see that support level give way. The market has been beating up on the Canadian Dollar lately and is well short. I think the larger reaction in the currency comes on the back of a softer number. Stops get tripped through 1.3600, resistance light at 1.3665, better at 1.3730.

Good luck.

?