Today's FX Comment
Patric Booth, CFA
Managing Director, Fixed Income and Currencies at National Bank of Canada
April 15, 2024
Good morning and happy Monday. I am back after an extended weekend spent watching my daughter and her team compete in the U14 Ontario volleyball championships. I am happy to report my daughter's team took home bronze in their division. It was really incredible to watch all the teamwork, camaraderie and competitiveness among these young ladies.
And what a difference a few days makes for the market. Stocks and overall risk sentiment seemed to weather last week's hotter US inflation print but when you layer on geopolitical risk it became too much for the market to bear. Friday turned into a typical risk off day with equities lower and the US Dollar benefitting from flight to safety flows. Today, the world seems to be a mildly better place, but we know that can change very quickly.
Overnight, Asian indices all traded lower ex-mainland China where stocks got a lift after regulators pledged to tighten stock listing criteria, crack down on illegal share sales and strengthen the supervision of dividend payouts. Geopolitics is at play here as well with the US accusing China of supporting Russia's war effort in Ukraine by helping it ramp up Putin's defense production capabilities. Tonight we get a data dump out of China including GDP, Industrial Production, Retail Sales and Fixed Asset Investment.
Risk sentiment has staged a mild recovery since Europe walked in with the market breathing a sigh of relief that Iran's attack on Israel wasn't as bad as feared. I am no expert and I am certainly not making light of Iran's actions but it all seems for lack of a better word, orchestrated. Israel attacks Iran's consulate in Syria, Iran can't stand by and not react so they give plenty of notice about retaliation, they send 300 drones and missiles toward Israel, 99% are intercepted and thankfully there are no fatalities. Iran then says that it does not want to raise tensions in the region, more like calling it even for Israel's consulate attack. The US then tells Israel to take this as a win and move on. All way above my pay grade but for now the market is seeing this as a bit of a win as well. In the meantime, various ECB speakers are still calling for a June rate cut.
Futures point to a higher open in North America as equities try and bounce back from Friday's selloff. Still the market might remain cautious over the next several days as we await Israel's response to the recent attack. Maybe best to keep an eye on crude for clues to overall sentiment. After trading up to $87.67 earlier this month and again on Friday, WTI is back below $85 this morning.
FX thoughts: Geopolitics may continue to support the US Dollar in the near term but that support may waver depending on Israel's response. The market is only pricing in 40bps of Fed cuts for the remainder of the year, an incredible shift over the last three and a half months and maybe that move has run its course? In the meantime, IMM data shows leveraged names were heavy buyers of US Dollars last week (IMM report as of the close of Tuesday) and no doubt there was even more Dollar buying at the end of the week. I am not saying the Dollar move is over but be wary of potential liquidation on any lowering of geopolitical tension.
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JPY - Remember the old days when the Yen benefitted from flight to safety, well that doesn't seem to be the case any longer. We continue to get verbal intervention but it feels like the market will continue to push until we see the real thing. There isn't much on the charts until 159.30 but I don't think Japanese officials will let things go that far. Long vol probably makes sense here.
AUD - Metal prices are on fire, copper, nickel and aluminum are all trading higher and most importantly for the Oz, iron ore prices are up about 13% since bottoming at the start of the month. Of course, equities and overall risk sentiment trumps all that and we'll need stocks to stabilize for AUD to appreciate further. Support .6440, resistance .6540.
EUR - The ECB's Villeroy and Simkus were both talking up a June rate cut today. No surprise at this point. Support 1.0615.
GBP - We get the UK employment report tomorrow followed by inflation data on Wednesday. Core inflation is expected at 4.5% YoY while wage growth is expected at 5.6%. I'm not sure why the market has almost a 50% chance of a June BOE rate cut priced in. Support 1.2440 and 1.2350.
CAD - Risk off typically equals a weaker Canadian Dollar and last week was no exception. Tomorrow we get inflation data out of Canada which of course has potential to be a big mover. Core measures are expected to come in marginally lower but we all know by now that CPI ex-shelter is 1.3% so it is all about when the BOC chooses to "look through" that shelter component. With USDCAD up here I'm not sure they are ready to do that but there is plenty of time between now and June 5th (and more data to look at). Resistance 1.3780 and 1.3815.
Good luck.