Today's FX Comment

October 16, 2024?

Good morning and happy hump day. Let the political fight begin: the provincial government of Ontario is trying to pass a law that will force municipalities to obtain provincial approval to create more bike lanes if their plans take away road space now used by cars and trucks. I won't wade into the debate (I take the subway most days), but one thing I will say, I believe it when Ontario's transportation minister says that commuters in the GTA now face the longest travel times in North America, and the third worst in the world. The gridlock is really awful.

The definition of malaise is an uneasiness whose exact cause is difficult to identify. I think the word malaise would best describe the state of the market this morning. Nothing was really great about equity market performance overnight, but we just can’t put our finger on exactly why. Maybe it is ongoing disappointment around the size of Chinese stimulus or the lack of specifics in this past weekend's round of fiscal stimulus? Maybe the market is getting a bit more nervous about the upcoming US election now that it is less than three weeks away. I mean we all know "tariffs" (plural) is considered by Donald Trump to be "the most beautiful world in the dictionary" but it probably isn't the most beautiful thing for overall sentiment.

Asian indices were mostly lower overnight with the Nikkei leading to the downside. No surprise chip names like Tokyo Electron were under pressure after ASML's earnings yesterday. Chinese President Xi reiterated that China is willing to be a partner and friend with the US, while Hong Kong CEO Lee said this year would be all about attempting more business friendly policies but neither helped stocks with the Hang Seng and indices in mainland China ending the session relatively flat.

The FTSE is outperforming this morning on softer UK inflation data but elsewhere European equities are lower. Of course, thoughts of Trump tariffs (and let's not forget counter-tariffs) have to be weighing on sentiment this morning. I think most agree Europe has more to lose then the U.S. in a tariff war. Futures point to gains on the open in North America and cheer up, we have had United Airlines and Morgan Stanley report before the bell and both beat (for those keeping track NVDA does not report until November 19...).

Random thoughts:

1. Take a look at the recent inflation data we have seen. I will use headline CPI (not just because it is typically the lowest, but let's face it, people pay for food and energy so you can't ignore it and headline goes a long way to shaping inflation expectations): Canada: 1.6%, UK: 1.7%, EU: 1.8%, New Zealand: 2.2%, China: .4%, I mean these are some pretty low numbers. Even in the US headline inflation has slid from above 9% to 2.4% today. It doesn't seem like long ago we were talking about Paul Volcker style 1980's inflation but that has fallen by the wayside hasn't it. I know you'll say it is all about core or services inflation, but they are falling too. Central banks will say monetary policy acts with long and variable lags, if policy takes 12-18 months to be fully felt I wonder if the debate shifts to central banks not cutting quickly enough (keep that in mind ECB and Bank of Canada).

2. US yields are off their recent highs but they have really jumped post-NFP (2 year +22bps, 10year +17bps) and I can't help thinking that the market has overreacted to one data point. Recall the two previous NDFP releases were very uninspiring and of course we had a huge 800k+ downward revision in August. October's release was good, but one month does not make a trend.

3. I don't know who will win the US election, but the betting market is leaning toward Trump and Bloomberg today said the Trump trades are higher yields, higher inflation and a stronger Dollar. All I know is that consensus seems to build in the market, the consensus trades get put on in decent size and then they seem to work for a short period before they unravel, things rarely play out as everyone expects. We'll see but if Trump gets in and if he starts to spend and cut taxes and debt and deficits mount I can see yields moving higher but is more spending and debt a huge plus for the US Dollar? I'm not saying the US is the UK or the Dollar is the Pound but anyone recall what happened to Sterling in September 2022? Or what is Trump simply says the US Dollar is too strong making the US less competitive? Just food for thought.

FX thoughts:

JPY - BOJ member Adachi said that the BOJ will raise rates "very slowly" and clearly that means not until well after the election. The BOJ is seeking that "virtuous" wage cycle so it is interesting to note that Japan's largest union is making noise about demanding a wage hike of at least 5% in 2025. The Fed will be cutting while the BOJ will be hiking. I think toward month end it will be worth looking at 3-6 month downside USDJPY structures. Watch for verbal intervention on a move toward 150.

AUD - The Oz continues to grind lower as the market struggles to determine if China has done enough in terms of stimulus. We have Australian employment data tonight and that will obviously be a key near term driver. If we get to .6620, re-load longs.

EUR - Everyone knows the ECB will be cutting tomorrow, the question is will Lagarde signal more to come. The market is certainly expecting further rate cuts so I suppose any surprise would be a more hawkish sounding one. So far, support between 1.0880-1.0900 is holding (200day MA = 1.0874) next downside level is 1.0815.

GBP - UK inflation data was softer than expected this morning with headline at 1.7% and core at 3.2% YoY. Given BOE Governor Bailey's itchy trigger finger, the data has given him the go ahead and cut next month with the market now pricing in a greater likelihood of another cut in December. Support at 1.3000 was tested overnight and Cable has managed to bounce, I think with back to back rate cuts mostly priced in now maybe you buy this dip via GBP Call spreads.

CAD - The market has 45bps of cuts priced in for next week's BOC meeting and almost 83bps in between now and year end. That is probably enough for the time being. The market also has the short CAD trade on and ran into a wall of offers above 1.3800 yesterday. Interesting to note that despite the move higher in spot CAD vols have barely moved. In fact, 1 year atm actually traded a bit lower yesterday than it did the previous week with lower spot. Kind of makes you think risk reversals are over-priced. At any rate, the vol market is telling you there is no panic on this move in spot, people are long USDCAD it seems and are content to sell topside strikes to generate premium and fund their position. Maybe the move up is running out of gas, I have a feeling the BOC might be a buy the rumour/sell the fact moment. Tiff will go 50, and I think it will be another 50 in December but he certainly won't guarantee that next week. Initial support 1.3740.

Good luck.