Today's FX Comment

May 1, 2024?

Good morning. An exciting game for Toronto fans last night. The Leafs beating the Bruins in overtime in the playoffs is almost as rare as that solar eclipse we had a few weeks back....

It certainly feels like the calm before the Fed storm today. With a good part of Asia out on holiday and most of Europe closed as well, volumes were definitely lighter in the overnight session. Markets in China, Hong Kong and several other countries were closed for trading so it was up to Japan, Australia and New Zealand to pick up the slack. Given a very weak handoff from North America it should come as no surprise that equity markets there traded lower overnight. Of note: reports out of Japan that the government is considering tax breaks for companies that repatriate and convert foreign profits back into Yen in order to support the currency. Also of note: China has scheduled its third plenary session of the 20th Party Congress for July. The meeting has been delayed since last Fall and the market hopes that the gathering will finally bring about some meaningful stimulus to help prop up the Chinese economy.

Most European markets are closed today, but the UK's FTSE is a bright spot in an otherwise sea of red managing to eke out small gains this morning. Futures point to a softer open in North America but we all know it will be what happens post-Fed today that determines where we close. Of course, we expect no rate change today, little change to the statement and there are no new dots to fret over so it really all comes down Powell's press conference. Pretty much everyone you talk to expects Powell to be hawkish today so perhaps the bar has been set pretty high for an even more hawkish surprise.

On April 16th, Chair Powell said: “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence. That said, we think policy is well positioned to handle the risks that we face.”

I don't think he says all that much different today. Since April 16th we have seen mostly softer data out of the US with weaker than expected:

- S&P PMI (manufacturing contractionary)

- GDP

- KC Fed

- Michigan sentiment

- Dallas Fed

- Chicago PMI

- Consumer Confidence

Yes the employment cost index was hotter than expected yesterday, but all the other data might outweigh that and remember at the end of the day, Core PCE (still the Fed's preferred inflation measure) came in at 2.8% YoY late last month, right where Powell expected it to be.

I expect Powell to more or less echo his words from a few weeks back, basically higher for longer. Now doesn't seem to be the time to turn more hawkish with the recent data slowing and core PCE on a 2 handle. The market barely has one rate cut priced in for the remainder of the year, it feels like the bar to a hawkish surprise is quite high.

?FX thoughts:

JPY - The market is long USDJPY, the BOJ has intervened and I think they will again when tested, the BOJ may also bring forward rate hikes and now we have reports about the Japanese government floating tax breaks for companies that repatriate foreign profits and support the currency. It just feels to me that short Yen trades are looking more and more precarious. I know the market likes to push and will want to test the central bank but I think 6 month downside USDJPY trades are starting to make more and more sense.

AUD - The 1-2 punch of softer Aussie retail sales and weaker equities drove the Oz a lot lower yesterday but maybe this is your dip to buy. Perhaps a more hawkish Powell is all priced in, perhaps a more hawkish RBA is not, maybe China's economy has bottomed and I think metals will continue to trend higher. Buy an AUD Call spread.

EUR - Eurozone GDP has been improving, inflation has fallen pretty rapidly and I think the ECB will proceed cautiously with rate cuts. Nothing really bad there. A pickup in China would help as well.? Bids bumped up to 1.0630 now, same resistance levels 1.0730 and 1.0785.

GBP - UK house price data was softer than expected this morning, but it has had limited impact on Sterling. All about reaction post-Powell for Cable. Nearby support at 1.2470 followed by 1.2430, resistance 1.2580.

CAD - Softer than expected inflation, rising unemployment and weaker GDP, the BOC should be cutting rates post haste. Cutting sooner might salvage some kind of soft landing and save the Bank from having to cut even more aggressively down the road. Mortgage interest costs keep going up (really the main driver of inflation by far) as do taxes, hard to see consumer spending doing anything but slow down and a growing labour pool should help cap wages. All that said, it is about broader moves in the US Dollar at the moment.? I see resistance between 1.3795-1.3815, with initial support at 1.3730.

Good luck.