Today's FX Comment

February 14, 2024?

Good morning and happy hump day. I read a disturbing article this morning. Police arrested a man at Yorkdale mall who was putting tracking devices on luxury SUV's. They caught him in the act of attaching one to a Range Rover. Scary to think you can't go to a shopping mall without the threat of someone stealing your vehicle. On the bright side it will keep my wife and daughter away from the Yorkdale mall and should cut down on my monthly Visa bill.

We kick the session off with the market in recovery mode after yesterday's CPI induced sell off. I think yesterday's stock market decline felt a lot worse than it actually was, at the end of the day the S&P was down -1.37% and the Nasdaq -1.8%, not great but I think we felt it more because the market hasn't gone down all that much lately. When you look, the S&P has rallied 20% since the end of October and the Nasdaq 24% over the same time frame. The move has almost been in a straight line higher. We've maybe forgotten what it feels like to have stocks trade lower.

Trading in Hong Kong resumed after a Lunar New Year break with equities initially dropping over 1% before rebounding to close higher. Other indices in Asia were less fortunate and took their lead from North America closing lower across the board. China is still out for the remainder of the week so headlines remain light out of Asia.

European equity markets are all in the green this morning cheered on by some softer than expected inflation data out of the UK and still healthy employment data out of the EU. Futures point to a higher open in North America as the market looks to rebound from yesterday's selloff. We'll see if stocks can hold on to gains.

Sentiment can sure shift quickly can't it. At the start of the year it was, tamer inflation, 160bps of Fed cuts, the 5 year yield at 3.84% and the 10 year at 3.87%, of course in hindsight it all may have been too aggressive. Today it is 90bps of cuts, the 5 year at 4.29% and the 10 year at 4.3% and now that rates have jumped a fair bit, there seems to be no shortage of forecasters looking for even higher yields and fewer Fed cuts. The market tends to swing from one extreme to the other, it was very optimistic to start the year and maybe now we've moved too far the other way.

At the end of the day, of course the Fed pays attention to CPI but remember core PCE remains? their preferred measure of inflation and it is a lot lower at 2.9% (if I recall the print was softer than expected last month). Headline CPI didn't meet expectations yesterday but still fell to 3.1% from 3.4% prior (I know headline doesn't get as much attention but for the average person it matters, people buy gas and groceries and headline goes a long way to influence expectations) and while core disappointed, it didn't go up but remained steady YoY. Powell has said the return to target will be a bumpy one, yesterday's data disappointed but I still think overall year over year, inflation is trending lower. A March cut was already off the table, May might be as well but the Fed will have three more core PCE prints and two more each of CPI and NFP to look at by then. The picture will be much clearer for them. In the meantime the move higher in yields has tightened conditions and done some work for them.

FX thoughts:

JPY - You knew it was coming, with USDJPY above 150 the verbal intervention has started with Japan's top currency diplomat Kanda noting that recent Yen moves were rapid and that authorities will take action if needed while Finance Minister Suzuki said he was watching FX markets with "strong sense of urgency". No surprise USDJPY is a bit lower this morning. 149.70 is now initial support.

AUD - The Oz has bounced this morning on the back of the rebound in equities. Australian employment data this evening will be key. Support .6450, resistance .6520 and .6570.

GBP - Pop the champagne corks, UK CPI was softer than expected this morning, of course core is still running at 5.1% YoY and services inflation which the BOE has highlighted is still 6.5% YoY. Seems like the inflation fight is still far from over in the UK and I think rate cuts will be hard to come by this year.? Old support at 1.2650 is now resistance while we should find bids at 1.2520.

EUR - EU GDP data was pretty much flat this morning matching some fairly low expectations, on the plus side employment and industrial production data were better than expected. The ECB's Lane reminded us that the next move will be a cut, but the timing would depend on data. Support 1.0670, resistance 1.0790.

CAD - Stocks have bounced and oil is higher which has given the Canadian Dollar a small lift this morning. Later today we'll hear from BOC Deputy Governor Mendes in a panel discussion (2:30 ET). There is no text and no press conference so it may not be much of a market mover but the topics are pretty relevant: the cost of living, housing and monetary policy. The BOC has been more vocal lately about the inability of monetary policy to reign in shelter inflation so it might be worth watching for a few interesting headlines today. In the meantime, resistance between 1.3520-50 has bent but hasn't quite broken yet. There should be more offers between 1.3600-20. 1.3470 is initial support.

Good luck.