Today's FX Comment

April 17, 2024?

Good morning and happy hump day.? It is a tough day for Maple Leaf fans, not only was Auston Matthews held off the score sheet last night but playoff match ups have been determined and the Leafs are facing the Bruins in the first round. Maple Leaf fans have that uneasy feeling again as the Leafs haven't beaten the Bruins in the playoffs since 1959 and are 0-4 against Boston this year. The optimist says the Leafs are due....

Overnight, Asian indices were mixed with the Nikkei leading the way lower while stocks in mainland China outperformed. Several Asian currencies remain under pressure, notably the Indonesia Rupiah, Thai Baht and the Vietnam Dong while the PBOC kept the Yuan fixing fairly steady at 7.1025. On another note, it is being reported that President Biden is looking to increase tariffs on Chinese steel and aluminum products to 25% and it would seem US-China relations remain tenuous at best.

European equity markets are in a brighter mood this morning and are trading higher across the board. Various ECB members are still talking a June rate cut while the BOE might be waiting longer after a hotter inflation print this morning. The market remains on less than firm ground though as we are still waiting on Israel's response to Iran's attack. Fears of escalation in the Middle East are still lurking in the background.

Futures point to gains on the open in North America but I think they have everyday this week. It's not where you start, it's where you finish. Macklem and Powell had a fireside chat yesterday and the market seized upon Powell's remark that "Given the strength of the labour market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us." Definitely a more hawkish statement from a normally quite dovish sounding Fed Chair but nothing the market doesn't know and isn't pricing in already. Three and a half short months ago it was six rate cuts, now it is maybe one, maybe none with some even saying a rate hike is in play. The market often swings too far one way and then too far the other, the truth is probably somewhere in the middle. For the Fed it is all about the data and I'm not sure it can keep holding up forever, eventually higher rates will bite.

FX thoughts:

JPY - I get higher US yields supporting USDJPY but when you look at the 10 year UST-JGB yield spread it looks like the move in USDJPY is slightly overdone. You know the BOJ is up there somewhere, US Dollar longs have to tread cautiously around 155.

AUD - The bounce in equities has given the Oz some breathing room this morning. Iron ore and copper prices continue to trend higher which helps the currency but we'll need a better risk backdrop for AUD to get a sustained move higher. Support .6390, resistance .6540.

EUR - ECB Chief Lagarde stated that the central bank would cut rates soon barring any major surprises and the market agrees with a June rate cut pretty much fully priced. 77bps of cuts priced for the ECB this year, 40 for the Fed. Maybe that spread has gone far enough for now. Support between 1.0600-1.0615, resistance 1.0730.

GBP - You know I have been saying for a long time I think the BOE will have a hard time cutting rates as early as the market expects and today's UK inflation data served as a reminder. Headline inflation did slow but came in above expectations as did the core measure which is still running at 4.2% YoY. Services inflation is 6% YoY and with wage growth running between 5.6-6% I think the market will end up pushing those BOE cut even further back. Support 1.2440 and 1.2350 in Cable.

CAD - BOC Governor Macklem remains stubborn and refuses to give strong hints at a June rate cut, even after the softer CPI data this week. Yesterday alongside Powell the Governor would only say that inflation is moving “in the right direction". Perhaps Macklem remains concerned about sparking that Spring housing market but let's see, the 3 month moving average of Median and Trim CPI Annualized = 1.25%, CPIX = 2% and CPI ex-shelter = 1.5%. Come on Governor Macklem, we know it is time to get serious about rate cuts, especially when most of the job gains over the last several months have come from the government (unsustainable) and only one province (Alberta). The market is pricing in 43 bps of cuts over the next three BOC meetings it should be 50ish I think but right now it is more about geopolitics, US data and broader moves in the US Dollar. USDCAD sellers backed off yesterday but stabilization in equities (if we get it) should bring them out today.

Good luck.