Today's FX Comment

January 23, 2024?

It was a lively Asian session overnight with news out of China stealing the spotlight from the BOJ. Chinese officials seem to be doing their best to prop up ailing equity markets with China's Premier Li Qiang reportedly asking authorities to take more “forceful” measures to stabilize Chinese equities. Shortly thereafter there were reports that China would be implementing a $280bio rescue package for its stock market. There were further reports that Chinese authorities would be expanding the current net stock selling ban from major mutual funds to some insurers. The market was cheered again when China also appeared to (potentially) reverse course on its proposed rules to control spending in video games after the draft regulation was removed from official websites. The Hang Seng ended the day +2.6% higher with mainland equities up as well but let's put things into context, the Hang Seng is down 30% over the last year so there is a lot of ground to make up. As always, the rescue package reports have not been verified and let's not forget China still has troubles in its property sector that will continue to weigh on sentiment and the economy. The bounce might be short lived but I guess the market will take it for now.

The news out of China hasn't given sentiment all that much of a boost with European equities pretty flat on the day. Maybe the market has heard all the stimulus promises before and remains in "believe it when I see it" mode. Likewise, futures point to a flattish open in North America but after a rocky start, the S&P is up about 2% YTD, not terrible on the heels of a 20+% return last year.

This week US GDP and Core PCE data will obviously be key. I am hoping for a better than expected GDP print, we all should be as it means a greater probability on a soft landing. One might worry that "good news is bad news" for the market and a hotter GDP might have people thinking it lowers the odds of Fed rate cuts but I disagree. I think for the Fed it is all about inflation now (their preferred measure remains Core PCE) and as long as inflation continues to cool the Fed can and will cut rates. Better GDP + as expected or lower Core PCE and I think the equity market will like it a lot.

FX thoughts:

JPY - No real surprise last night, the BOJ left rates and YCC unchanged as expected. USDJPY initially traded higher before falling and briefly/barely touching a 146 handle as BOJ Governor Ueda spoke and the market judged him to be ever so slightly less dovish (no central bank head with negative rates can be called hawkish). The rate path is clearly dependent on the outcome of the upcoming wage negotiations (which kick off this week) and Ueda noted that "the number of companies that decided to hike at this year's spring negotiations is higher than last year." The Governor also noted that the likelihood of achieving the BOJ's 2% inflation target was rising with the Bank's forecasts for longer run inflation increasing to 1.8%. I still prefer selling rallies here with policy shifts coming from both the BOJ and the Fed. Resistance between 148.35-50.

AUD - The Oz has been given a boost by the stimulus reports out of China, business confidence data also showed an improvement overnight giving the currency an extra lift. No change in thinking, RBA rate hikes should still be on the table, the market should not be pricing in any cuts. Buy dips. Support .6520, resistance .6620 and .6690.

EUR - The latest quarterly Euro Area Bank Lending Survey highlighted that credit standards tightened in Q4 with the trend continuing into Q1. I suppose that means tighter financial conditions so does that mean the ECB can cut rates sooner? All about Lagarde later this week, for now 1.0840 remains nearby support.

GBP - Cable remains in a 1.2650-1.2740 range. This morning we saw better than expected budget numbers out of the UK with some thinking that might give the conservative government a tiny bit of room to cut taxes (which of course they will do heading into an election). I still think the BOE will have a very hard time cutting rates with core inflation sticky on a 5 handle.

CAD - The ECB has pretty much admitted that rates have peaked, more importantly the Fed is talking rate cuts this year, isn't it time the BOC dropped the "Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed" line from their statement? I mean I think we all know that they are done hiking rates. You know how I feel, the Canadian economy is at stall speed and the longer the BOC remains stubborn the greater the chance of a very hard landing for the Canadian economy (which in the end will lead to even more aggressive rate cuts). As we all know, mortgage interest costs are by far and away the largest contributor to inflation with rent coming in at number two. The Canadian government is planning to cut back on the number of international students but we already have a housing shortage and its not like the number of students is going down, there will still be another 350-400,00 coming in and it is hard to believe BOC rate hikes can stop rent inflation with the population growth we have, in fact higher rates makes the situation worse by increasing construction costs (plenty of abandoned real estate projects over the last year or so) . For today Funds looks to tread water, its all about the Bank tomorrow. I think opening the door to rate cuts would actually be a positive in the end as it shows the Bank has an eye on economic growth. Support 1.3445 and 1.3380, resistance 1.3520.

Good luck.