Today's FX Comment

February 2, 2024?

Good morning and TGIF. It is a bittersweet weekend coming up as it is the first time in a longtime we won't have NFL football to watch. That being said there are a few entertaining things to catch on tv this coming Sunday. First up we have Fed Chair Powell on 60 Minutes Sunday night, he's no Patrick Mahomes (and we won't get a glimpse of Taylor Swift) but he should have a few pearls of wisdom for us (his appearance may keep Monday option vol better bid than normal). Secondly, we have the premiere of the 12th season of "Curb Your Enthusiasm" which I can't wait for. After a two year plus break I am really looking forward to seeing what Larry gets himself into this year...

You know the story by now, after the bell last night Meta, Amazon and Apple went three for three with earnings beats with Meta coming out the big winner (stock buyback, quarterly dividend, that almost sounds like a bank stock now...). Apple disappointed somewhat on China concerns but Amazon is up nicely pre-open and Meta shares look set to jump about 17% this morning.

That set a pretty positive risk tone for the overnight session with equity indices in the green everywhere except in Hong Kong and China (as has become the norm now). China's Shanghai index saw a bit of panic selling and declined as much as 4% testing a key technical point (2660 March 2020 low) before recovering to end the session "only" down 1.5%. No doubt state banked funds helped cushion the blow there. We'll get Chinese inflation data next week with the YoY number expected to be in deflation territory at -.5%. Plenty of room for rate cuts here it would seem, Chinese press reports keep calling for it, you wonder when or if it happens.

It is green light risk on this morning in Europe with markets rising on the back of last night's tech earnings. Industrial production data out of France was a lot better than expected as well giving sentiment an added boost. Futures point to a higher open in North America, no surprise given tech earnings but of course it is NFP day so we'll see what the data brings and its overall impact. I have been saying recently that NFP matters a lot less as the job market remains solid and the Fed's focus is solely on the inflation component of their dual mandate (core PCE in particular) but maybe NFP still matters a bit after Chair Powell's press conference this week. He did note that rate cuts could speed up if the labour market weakened materially so we'll have to keep an eye on NFP for that. Economist estimates are for a +185k print, while the whisper number is higher at +209k so clearly the market is looking for a solid print. I think anywhere between +130k and +220k is just fine.

Final thought: keep an eye on that commercial real estate market, Japan's Aozora bank traded down another 16% last night, a major Canadian REIT took a $510 million write down on their property portfolio this week and shares of New York Community Bancorp remain under heavy pressure. I know many analysts are convinced we won't have another US regional banking crisis and maybe that is the case with the Fed set to cut rates later this year but I always get a bit concerned when I hear the line "this time it's different".

FX thoughts:

JPY - All about US yields post-data today. BOJ and Fed will be going in different directions very soon. I like selling rallies.? Resistance between 148.35-50.

AUD - Risk on = higher AUD and the Oz is the top performer among the majors today. I think the market is way to aggressive in pricing in rate cuts here and like Oz higher. Resistance .6620 and .6690.

GBP - Cable is flirting with a break of the recent range trading above 1.2740 this morning. I can't see the BOE cutting rates anywhere near as much or as soon as current market pricing. Higher stocks = higher Cable. Next topside level is 1.2820.

EUR - We flirted with a break of the lower end of the range but it has held and I think we're back to trading 1.0840 - 1.1020.

CAD - Yesterday, BOC Governor Macklem testified in the House of Commons and said "You're not going to solve housing with low interest rates and you're not going to solve it with high interest rates. We've tried both and we've had higher shelter inflation." Right, mortgage interest costs rose 28.6% YoY in December and at some point, the BOC has to realize that their rate hikes have done nothing but add to shelter inflation. In the meantime, the Canadian economy is on life support and don't think we won't have issues with commercial real estate here either. Time to think hard about rate cuts or risk a very hard landing for the Canadian economy. We are trading right near 1.3380 support next downside level is 1.3320.

Have a great weekend.

Good luck.

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