Today's FX Comment

August 23, 2024?

Good morning and TGIF. Canadian railways are back in business but the TTC felt like it was on strike this morning, it was a very slow subway ride into work…

Overnight, Asian equity markets ended the session mixed with overall moves pretty limited. No doubt Asia was treading water waiting for news out of Jackson Hole. Of note, BOJ Governor Ueda leaned a bit hawkish in his testimony before parliament while in China the real estate woes continue with reports noting that Chinese property developers’ losses exceeded $8bio in the last week alone.

Risk sentiment firmed up in Europe with indices there all in the green this morning. French business sentiment was better than expected (an Olympic boost I guess) while the ECB's Kazaks reminded us that a September ECB rate cut was coming noting that staff projections showed room to cut interest rates as inflation remains broadly on the declining path.

Futures point to gains on the open ahead of today's main event, Fed Chair Jay Powell's Jackson Hole speech at 10am ET. I'm not sure he can say anything all that shocking. It is pretty obvious based on the Fed minutes we saw this week that the FOMC is onboard with a September rate cut. The only question is will it be 25bps (what the market is currently leaning towards) or 50bps and I would not expect Powell to signal that intention one way or the other today, especially ahead of next month's all important NFP data. I suppose he could say he is open to either alternative at that the decision in September will be data dependent. There are also some who say Powell might "push back" on the market pricing in 90-95bps of rate cuts for the remainder of the year but I doubt it. To me, the Chair has been one of the more dovish sounding FOMC members this year, he won't change today. Powell also reminded us early on about the Fed's dual mandate and has seemed more concerned than many about the state of employment. This month's soft NFP report, a rising unemployment rate and a 818k downward NFP revision probably don't help soothe his concerns over the US job market. I think Powell simply confirms a September rate cut is in the cards and goes for maximum optionality today, no guarantees about the size of cuts, the speed of cuts or the future rate path. That being said, let’s not forget his desire to go down in history as the only Fed Chair to engineer a soft landing……

FX thoughts:

JPY - BOJ Governor Ueda testified before Japanese parliament last night and leaned hawkish. The Governor stated that if the economy moved as expected then the BOJ was still on the rate hike path. Ueda also added that current rates are far below the likely neutral rate (no kidding). Japanese CPI was also released with headline a touch higher than expected and still above target at 2.8%. The Fed will be cutting while the BOJ has rate hikes on the table. I think USDJPY remains a sell on rallies. Support 143.70.

AUD - The Oz is the top performer among the G10 today and as we have mentioned previously, there just isn't much of a reason to sell AUD at the moment. Iron ore and copper look to have stabilized, the RBA won't be cutting rates this year (despite what the market is pricing in) and equities remain on firm footing. .6800 is significant resistance, support .6690.

EUR - 1.1140-50 remains very solid resistance, a break would target the 1.1276 high from July 2023. All about reaction post-Powell today.

GBP - Cable is bumping up against resistance between 1.3125-1.3140 again this morning (July 2023 high). BOE Governor Bailey speaks at Jackson Hole after Powell and if the BOE head sounds a little less accommodative then the Fed Chair, Cable might just break higher. The UK data has held up well and wage growth and services inflation remain a concern for the BOE. Maybe a more cautious sounding Bailey today. A break would target 1.3300. Support 1.3045.

CAD - The Canadian railway stoppage is over as the Liberal government stepped in to order everyone back to work and to binding arbitration. That happened a lot quicker than most expected and certainly avoided a potentially much worse outcome for the Canadian economy. We has some more good news this morning with Canadian retail sales topping expectations and the July flash estimate looking pretty healthy. The data though has not been hugely impactful as today’s stronger print won’t derail the three BOC rate cuts the market is pricing in for the remainder of the year. Still, the end of the railway stoppage and better retails sales data should be good news for the Canadian Dollar. In the end it is probably more about Powell and broader US Dollar moves today. More about extended CAD short positions as well. Watch for a close below the 200day MA today (1.3593), if we get it I would expect positions to get pared back further next week which could take USDCAD down toward support at 1.3520 and perhaps onward to 1.3460. We should see offers ahead of 1.3640 now.

Have a great weekend.

Good luck.