Today's FX Comment

August 27, 2024?

Good morning. I read today that Oasis is getting back together for a series of concerts in the UK next summer. That sounds great but I would advise ticket buyers to check the refund policy. No guarantee the Gallagher brothers manage to keep the band together that long.

We kick the session off with the market treading a little bit of water. I guess we could use the term "cautiously optimistic" ahead of tomorrow's big earnings report from Nvidia. Overnight, Asian indices were mixed with the Nikkei and the Hang Seng leading the way higher. In a move that comes as no surprise, China's Ministry of Commerce announced that they opposed Canada's decision to slap tariffs on Chinese EV's noting they see the move as breaking WTO rules. China urged Canada to immediately correct its "erroneous" practices but we all know that won't happen, it is the ongoing de-coupling of the west from China. In the meantime Chinese industrial profits data improved overnight coming in at 4.1% YoY with more positive news from the CEO of BHP who stated he believes that China's economic growth fundamentals remain intact. BHP also highlighted "a lot of attractive growth ahead in copper" and the comments have helped lift both iron ore and copper overnight (maybe a bit of talking your book there?). On the flipside: Bloomberg reports that Temu parent PDD Holdings missed revenue estimates last night and gave a very downbeat outlook noting that their profits are expected to decline as China's economic growth slows. Who do you believe?

European equity markets are all in the green this morning shrugging off some soft German consumer confidence data (we're used to poor economic news out of Germany by now) while futures point to a flattish open in North America. When you think about it, it is hard to believe looking back at the moves we had on August 5th that the S&P and the Nasdaq are both on track for monthly gains. Let's not get ahead of ourselves though, Nvidia results after the bell tomorrow will determine whether indices hang on to (and build upon) those gains or give them all back and more. Forget core PCE on Friday, sentiment into month end and right through to the September 6th NFP report will be driven by the NVDA forward guidance tomorrow.

FX thoughts:

JPY - Japanese services PMI was a touch softer than expected last night but at 2.8% YoY it is still well above the BOJ's inflation target. I still think USDJPY is a sell on rallies, the Fed will be cutting while the BOJ will be hiking again. We will have a new PM in Japan at the end of September and if it turns out to be Shigeru Ishiba political pressure may mount to deliver a stronger Yen.? Support at 143.70.

AUD - The Oz has been given a small lift this morning on the back of firmer metals prices. That being said, the .6800 level remains very good resistance for the time being. We get monthly CPI data out of Australia this evening and it is expected to decline a fair bit to 3.4% YoY. The drop in inflation is largely on the back of cost of living relief measures and the RBA has already stated they will look through temporary measures to lower inflation. Bottom line: metals prices look to have bottomed, employment growth remains healthy and I do not think the RBA will be cutting rates anytime soon. Decent NVDA results (if we get them) would propel stocks higher and that positive risk sentiment would be enough to drag the Oz higher alongside. Next topside levels between .6875-90 followed by .7140. Support .6690, buy dips.

EUR - ECB member Knot was pointing fingers today saying that an inappropriate fiscal stance has hampered the effectiveness of monetary policy adding that the ECB assumed most of the burden of bringing inflation down. I think Knot should just be pleased that inflation is expected to fall to 2.2% YoY this Friday and that the ECB is in a position to cut rates again next month.? Initial support should come in at 1.1140 now followed by 1.1085. The 1.1276 high from July 2023 remains the topside target.

GBP - The market is pricing in just shy of two more BOE rate cuts for the remainder of the year. I think that might be correct for now, but if the Labour government increases taxes and cuts back on spending (budget in October) it will not doubt slow the UK economy which in turn could spur a more aggressive path from the BOE. That might eventually weigh on Sterling but fiscal responsibility is ultimately a positive. For the time being it is more about Fed rate cuts and overall risk sentiment. 1.3300 remains the target.

CAD - We don't have much in the way of data out of Canada until Friday's GDP release but in the meantime, USDCAD has not been able to muster much of a bounce after breaking down through 1.3500. It feels like those long standing CAD shorts are continuing to pare back positions and for the time being that is limiting any move higher in USDCAD. 1.3460 is nearby support followed by 1.3415. It feels like we will run into plenty of offers between 1.3500-20 with more at 1.3575.

Good luck.