Today's FX Comment

March 19, 2024

Good morning. We had some excitement out of Japan last night and I don't mean the latest episode of the series "Shogun" (a pretty good show by the way). The Bank of Japan hiked rates for the first time in 17 years. I'm sure there are a lot of people in the market who have never seen that. As you might guess, I have I suppose it tells you how long I've been around, I've seen overnight ATM Yen vol trade at 100 and breakeven....(about 6 big figures by the way...)

Overnight, Asian indices were mixed with the Nikkei shrugging off the BOJ rate hike (more on that later) to trade back above 40,000 while stocks in Australia also ended the session in the green after the RBA leaned less hawkish at their rate announcement. At the other end of the spectrum stocks in Hong Kong and mainland China finished the session lower as the property woes in China continue. Sentiment took a hit after reports that Evergrande has been accused by China's securities regulators of inflating revenues by $80B over the last two years. Sino-Ocean also gave some pretty dismal guidance noting pressure from the ongoing downturn in the property market.

European equities are also mixed this morning with moves fairly limited overall. I would note though that the economic data seemed encouraging today with economic sentiment measures out of both Germany and the EU as a whole much better than expected while EU wage growth data was much tamer than expected falling to 3.1% YoY from a prior 5.2%. All in all it seems rather positive.

Futures point to a lower open in North America, maybe some defensive posturing ahead of tomorrow's FOMC combined with a bit of disappointment around yesterday's Nvidia conference. A new Nvidia chip that apparently will offer up to a 30x performance increase while using 25x less energy sounds pretty great to me, but you can tell expectations were for even greater things. Pretty high bar for Nvidia to beat.

As for the Fed will they or won't they shift PCE/core PCE forecasts upward and will that median dot still signal three rate cuts this year or only two. You can make a case for either outcome, one thing I do expect is that if we see the dots showing only two cuts, Chair Powell will remind us that the dots are nothing more than a guess and do not represent the path of monetary policy. To me, Powell has been rather dovish/accommodative sounding, certainly a lot more so than many other Fed members and I don't expect that to change tomorrow.

FX thoughts:

JPY - The negative interest rate period in Japan is over (for now at least) with the BOJ hiking rates for the first time in 17 years. The central bank also scrapped YCC and is ending ETF purchases. The hike itself was not fully priced in by the market and the textbooks say that should mean a stronger currency right, wrong. The rate hike is being seen as a very dovish one as the BOJ has pledged to remain accommodative and continue to buy JGB’s in approximately the same amounts as before (wait isn't that YCC?). I don't think various Japanese authorities will be thrilled with currency weakness so I would expect some verbal intervention if USDJPY continues to push higher but we'll need an accommodative sounding Powell and a dip in US yields for USDJPY to make a more sustained push lower. Resistance 150.90 and 151.70, support 148.30. As an aside, overnight Yen ATM vol has easily broken even and more.

AUD - The RBA held rates steady as expected but the rate announcement was seen as more dovish with the central bank removing the line "...a further increase in interest rates cannot be ruled out" and replacing it with "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out." A shift from a mildly hawkish to a more neutral stance. In the press conference RBA Governor Bullock sounded a bit more hawkish but for the currency the damage was done. I think it was probably a mistake to take that line out and I think rate cuts won't be forthcoming this year from the RBA. Support .6480 and .6440.

EUR - The data was better than expected this morning and EU economic surprise index continues to grind higher reaching its highest level in almost a year. I know you can argue it is a low bar to beat, but the EU data is surprising to the upside just when the US data has been showing more downside surprises. Nearby support at 1.0840 (200day MA) with more bids likely at 1.0800.

GBP - UK CPI data is due out tomorrow ahead of the BOE on Thursday. The core YoY number is expected at 4.6% and with wage growth running close to 6% it just feels to me like a summer rate cut in the UK seems aggressive. I don't think the BOE can be anywhere near signaling a rate cut. Back in the 1.2650-1.2740 range for Cable for now.

CAD - We have Canadian CPI data up shortly and the headline and core measures are all expected to tick higher from the previous month. That obviously makes it harder for the BOC to signal a rate cut. Of course, the Canadian economy is not exactly lighting things up so the Bank has to finely balance their policy moves or risk running a hard economic landing in my opinion. We're still on track for a summer rate cut but like the Fed, the timing keeps getting pushed back. Same levels: we should see offers at 1.3600 (they were pretty solid last time), support 1.3520 and 1.3480.

Good luck.

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