Today's FX Comment

October 2, 2024?

Good morning and happy hump day. One of my dogs underwent TPLO surgery the other day to repair a damaged ligament in his leg. I am happy to say he is doing well. The only thing not doing well, my wallet. Note to self, next time make sure to take out pet insurance.....

China remains out on holiday but Hong Kong re-opened last night and to say the recent round of Chinese stimulus is having a positive impact would be a definite understatement. The Hang Seng rose over 6% on the day with the mainland property index jumping 15%. Reports note that short sellers have lost $6.9bln over the past week alone on the back of the China rally. It wasn't all good news out of Asia though with stocks in the South Korea down about 1% and the Nikkei declining just over 2% on the session. Still, for the time being at least, it looks like China's recent stimulus will remain supportive for the Hang Seng and for mainland Chinese stocks at least.

European equity markets are mostly lower this morning although the losses have been somewhat limited. Of course, the market is in wait and see mode with respect to Israel's response to yesterday's Iranian rocket attack. Reports that Israel may target Iran's oil fields have helped to give crude another lift this morning and no doubt it is hard to generate positive risk sentiment when Middle East escalation lurks in the background.

Futures point to a lower open in North America as we digest today’s slightly better than expected ADP data. It is yet another piece of the employment puzzle as we head toward what really matters, Friday's NFP release. Yesterday's ISM employment component was very weak and while the headline JOLTs print looked decent both the hiring and quits rate continue to fall. Today’s number was inline and overall across all the data I would say softer so far this week. When Fed Chair Powell spoke recently, he suggested the labour market was solid but another soft NFP this week would bring that into question and would make a 50bp cut in November more likely. As we noted yesterday, we should cheer for healthier numbers and 25bp rate cuts, it means a soft landing for the US economy is much more likely, and that is a much better backdrop for stocks and the overall risk environment.

FX thoughts:

JPY - In the old days, worries about escalation of Middle East tensions would mean a stronger Yen on the back of risk off. I guess not so much anymore. The Yen is being weighed down today by more accommodative sounding talk out of PM Ishiba who said he hopes the BOJ maintains easy policy as a trend (he does have an election to win after all) and BOJ Governor Ueda who sounded patient when asked about further rate hikes. When you think about it though, the BOJ could hike a couple of more times and policy would still be pretty easy wouldn't it? Ultimately, I feel it may be more about the Fed's path here and with Powell and Co. set to cut further, I think you should use bounces in USDJPY to look at downside option structures. We should run into offers between 145.25-45.

AUD - Risk off usually means lower AUD but again we are bucking the trend today with the Oz trading a bit higher this morning. Sentiment may remain shaky until we see what Israel's next move is but to me there isn't much reason to sell AUD. China is stimulating their economy, metals prices are on a roll and the RBA stands out as one of the more hawkish CB's now. Dips are buying opportunities. .6825 should be very good support, the target is the .7135-55 area.

EUR - The market has 55bps of ECB cuts priced in between now and the end of the year. Tough to see much more than that. Ultimately, I think those rate cuts will be supportive for the EU Economy and in turn supportive for the Euro. We are near support at 1.1080 again this morning with more at 1.1030.

GBP - Risk off/weaker equities weighed on Sterling yesterday and it may be difficult for the Pound to rally in the near term with lingering Middle East uncertainty but overall, the UK economic data has held up, the Labour government looks to be on a more fiscally responsible track and the BOE will likely be cutting less than the Fed. I think you buy dips here. 1.3265 is nearby support

CAD - One word: rangebound. You know I think the BOC will go 50 this month and I think it will be another 50 in December. In the end, that would be a good thing, it would help the Canadian economy avoid a hard landing and may lead to a higher terminal rate. I think if they play it slow, the economy gets hit harder and ultimately they end up having to cut more. Get aggressive early is the best option for the BOC. One thing to keep an eye on: politics. The Bloc Quebecois has threatened to bring down the Trudeau government if the Liberals do not agree to increase old age security payments for people between the ages of 65-74 by October 29th. At a reported cost of $16 billion over the next five years, will the Liberals cave to the demand? If not, they will have to strike another deal with the NDP to stay in power (which may mean a different set of demands). Overall, not a good look.? Normally, political uncertainty is not good for a currency. Without trying to get overly political here, I will say maybe this time some uncertainty might help the Canadian Dollar out, especially since right now the polls look pretty certain when it comes to a Conservative majority government. The market might see that as: more fiscally responsible and more pro-business leadership, which in turn might give CAD a lift. For now 1.3430-40 is initial support followed by 1.3370. Resistance 1.3540 and 1.3597 (200 day MA).

Good luck.