Today's FX Comment

January 10, 2024?

Good morning. For some reason, I am always the last person in my family to get any type of technological upgrade so for Christmas my family decided to get me up to date and bought me a pair of airpods. I had long resisted figuring they were no big deal happily living life with my wired earbuds. Wow, was I wrong, airpods = life changing! No more time spent untangling that wire on the subway, just easy listening all the way into work, how could I have waited so long.....

The Nikkei was once again the star of the overnight session rallying another 2%. Anyone who bought the high back in 1989 is only 4500 points away from getting back to flat (talk about a lost few decades). Outside of Japan, Asian indices were lower in a relatively quiet session. There is still plenty of talk about rate cuts out of China, especially since tomorrow's inflation data will likely be very benign (deflation actually) but it feels like concern about the property sector might not be alleviated by a simple rate cut. There is also no doubt some geopolitical concern here around this weekend's election in Taiwan. Chinese officials have noted that China simply has no room for compromise with separatists so the election outcome and its potential impact on China/US relations will be closely watched.

European equity markets are mostly lower but losses have been pretty limited. The ECB's de Guindos warned that the disinflation process will slow in 2024 but the comments had little impact. Yields are flat while equity futures point to a pretty flat open in North America...overall flat sums thing up ahead of tomorrow's US CPI data.

Tomorrow's CPI release will of course be the key but as we have mentioned previously, a .1% one way or the other in any given month matters less than the overall trend and that trend is lower. Throw in the facts that China will continue to export disinflation around the world (at least in goods) and that rents continue to fall in the US exerting downward pressure on the lagging shelter component of CPI and you likely have a recipe for the trend to continue. The big argument is will the Fed cut in March or May, right now it looks like the market has 40bps of cuts priced by May, what if they skip March and just go 50bps a six weeks later?

FX thoughts:

JPY - The Yen is the underperformer this morning with USDJPY rallying after some softer wage data out of Japan. Average cash earnings printed at a measly +.2%, softer than the expected +1.5%. It should be noted though that when you sort through the numbers there was some distortion based on special winter bonus payments, base pay for regular workers rose 1.9% YoY, a pace not seen since the early 90's. Maybe the data wasn't as poor as first glance. No matter, the BOJ is on hold this month and will wait to see the result of the upcoming Spring wage negotiations before making a policy change. Unions are looking for 5-6% wage increases which should give the BOJ the green light to put an end to negative rates. I think you sell rallies here, resistance 146.00.

AUD - Australia's monthly indicator showed headline CPI slowing to 4.3% YoY but we'll have to wait until later this month to get the core data (which last printed 5.2%). In the meantime, job vacancy numbers released overnight showed the overall level of job openings remains about 65-70% higher than it was pre-pandemic. That labour market is still tight. You know how I feel here, the RBA won't be looking at cuts and should still be considering rate hikes. Buy dips. Resistance .6720 and .6820.

EUR - French industrial production data was better than expected and the ECB's De Guindos is talking about stickier inflation. That being said the Euro remains rangebound. The 200day MA supports (1.0847) with resistance at 1.1085.

GBP - No change. Support at 1.2650, nearby resistance around 1.2740 followed by 1.2820. I still think stagflation remains a real possibility for the UK but for now it is more about overall risk sentiment for Cable. I do think the BOE will have a much harder time cutting rates with inflation still running hotter than most places.

CAD - I think it is very likely that bids between 1.3300-20 have been moved up and would expect initial support around 1.3340 now. Resistance remains at 1.3415. Once again you know how I feel here 140bps of cuts priced in the US this year, about 121bps in Canada. US GDP still running at a pretty decent clip, Canada's non-existent while mortgage interest costs comprise far too much of the YoY increase in Canadian CPI. I think the BOC may end up cutting more than the Fed or at very least that 140/121 spread should converge which will put some pressure on the Canadian Dollar.

Good luck.