Today's FX Comment

October 22, 2024?

Good morning. Normally, I like to make jokes at the expense of Leafs fans but I went to the game last night and I have to say (tell me if you have heard this one before) "maybe this time it's different". The Leafs played with a little more intensity then I have seen. I may have to think about reserving a spot along Yonge street for that Stanley Cup parade after all...

Nothing really different for the market this morning. There was a real lack of economic data overnight so for the time being the focus remains on the increasing odds of a Trump Presidency and on lumping on Trump trades. Asian equity markets were mixed with the Hang Seng and stocks in mainland China managing small gains while elsewhere indices were under pressure. Japan's 10 year bond yield came up just shy of 1% and it has been noted that the last time we saw a 1 handle on the yield was back at the start of August just before that fateful August 5th day that saw stocks tumble and had the market talking about a potential inter-meeting Fed cut. Remember those days? Seems like a long time ago.

European indices are all lower once again this morning. Take your pick, the market on edge waiting for an Israeli response to Iran, thoughts of Trump tariffs and a trade war and/or rising bond yields. They all continue to weigh on sentiment.

Futures point to a lower open in North America as you guessed it,? higher yields continue to weigh on sentiment/stocks. The US 10 year breached 4.2% overnight and talk about a one way street higher. A 60bp move from the 3.6% low in mid-September is definitely an attention getter. The 4.32-4.35% area looks like resistance but in between now and the election the talk will remain all about Trump and simply put, the thought of tariffs, tax cuts and more deficits and debt all sounds inflationary so for now the path of least resistance is for higher yields. I think it is quite likely we will get some type of political gridlock in the US as it doesn't seem likely it will be a Republican sweep. That will likely contain some of Trump's plans (if in fact he wins). In the meantime, talk about eliminating taxes on social security benefits and overtime pay along with tax exemptions for firefighters, police officers, military personnel and veterans sounds good in order to get votes, but I'm not sure we'll see it in practice. Replacing lost tax revenue with tariffs just isn't that easy.

FX thoughts:

JPY - USDJPY is following the US 10 year yield higher although the move in spot might be outpacing the move in yield spreads by just a little bit. Various BOJ members have been making noise about looking at the upside risks from rising import prices but I think the central bank stays pretty quiet until after the Japanese election. I still like looking at longer term downside trades here.

AUD - The Oz has moved higher this morning and some might say why, I say why not. The bounce in Chinese equities may have helped sentiment a bit or maybe its just a delayed reaction to RBA Deputy Governor Hauser's hawkish comments yesterday. No matter what the Fed says, they will still be cutting rates, the RBA will not. I like long AUD. .6620-25 remains very good support .6770 is resistance.

EUR - The Euro is right on support at 1.0815 this morning, next level is 1.0775-80. Lots of talk about Trump tariffs hammering Europe and potentially driving the Euro to parity. I just find that often these consensus trades rarely play out as one expects. You would think the EU has to be better prepared to deal with Trump after eight years of hearing about tariffs?

GBP - We will hear from BOE Governor Bailey later this morning but I think it will be next week's UK budget that will be more impactful. Fiscal belt tightening might have the market pricing in more BOE cuts but ultimately I think more fiscal responsibility is a plus for Sterling. We are right on support at 1.2963 (100 day MA) this morning.

CAD - The market keeps running into offers between 1.3820-50 and perhaps resistance holds for today as we know it is all about the BOC tomorrow. 50bps is all baked in so market reaction will probably come down to the presser and what kind of guidance we get from Governor Macklem about December. I don't think he'll stray too far from "more cuts can be expected but we're data dependent". Maybe a buy the rumour/sell the fact moment for USDCAD as we know the market has steadily been selling the Canadian Dollar all month. Short CAD positions on the IMM are not as stretched as they have been but are still at some of the more extreme levels we have seen over the last several years. 1.3770 is initial support.

Good luck.

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