Today's FX Comment

January 2, 2023?

Good morning and happy 2024, I hope you had a wonderful holiday period. You may recall last year I talked about the movie "Everything, Everywhere All at Once" and how I couldn't get through it (I still never finished it), I have another film that may join the list: "Maestro". I know the reviews have been good but I got 15 minutes in and turned it off. I then read it got a seven minute standing ovation at the Venice film fest, maybe people were just happy it was over and they could leave? I'll guess I'll give it another try this week....

Bloomberg reports that the S&P's nine week win streak has been the longest since 2004 but this morning's price action isn't really hitting a winning note. Risk sentiment is under pressure on the first trading day of the new year and I suppose when you look at the headlines you can blame geopolitics at least in part. Russia ramping up attacks on Ukraine, Israel promising many more months of fighting Hamas, the US and Iran sailing warships through the Red Sea and President Xi talking about the inevitability of reunification with Taiwan. Then again, these stories aren't really anything new (sadly) so maybe the market is trading cautiously and taking a little bit of profit ahead of this week's employment data. The market has been pretty aggressive in pricing in Fed rate cuts, a big NFP print on Friday would really throw a wrench into the plans. Then again a friendly +150k print on Friday and the market will start to rip higher once again as 2024 might just be the year of the soft landing....

Overnight, Asian indices were mixed with the Hang Seng leading the way lower. Chinese PMI data was also mixed with the official government number softer then expected and hitting a six month low. On the other hand China's unofficial Caixin PMI data was better then expected with the output and total new orders sub-indices reaching new highs since May and February respectively. Who do you believe?

European equity markets are mostly lower this morning. PMI data out of Europe was better then expected on balance but we have to remember the bar is set pretty low and the numbers remain firmly in contractionary territory. Various ECB members are also kicking off 2024 where they left off in 2023 reminding the market that it is too soon to be thinking about rate cuts, however the market is picking up where it left off last year a well and continues to ignore the warnings of central bankers while pricing in aggressive cuts this year. Someone will be right.

Futures point to a softer open in North America ahead of a data heavy week. Tomorrow we have JOLTs, ISM and the Fed minutes, Thursday ADP all ahead of Friday's NFP main event. This week’s payrolls might just set the tone for Q1.

FX thoughts: After trading mostly lower into year end the Big Dollar is bouncing back this morning helped by generally weaker risk sentiment.

JPY - Tragedy in Japan after the weekend's major earthquake with markets not re-opened yet. USDJPY initially moved lower on the open before rebounding higher. Support 140.40, resistance 142.55.

AUD - We hit our .6820 target last week (and then some) with the Oz backing off this morning following equities lower. I still feel that the RBA might have to hike again which is definitely going against the majority of CB's this year. The market has rate cuts priced in by mid-year and that just seems silly with healthy wage gains and job growth, still high house prices and let's not forget, core inflation running at 5.2%. I find it hard to see rate cuts from the RBA, market mispricing in my opinion. I still like buying dips here. Support .6720.

GBP - UK PMI data was softer than expected and that alongside weaker equities/risk sentiment is weighing on Cable this morning. Interesting year coming up for the Pound, rate cut pricing seems too aggressive to me with still high inflation, does a less dovish BOE support Sterling or is the UK heading for stagflation. Support right here at 1.2650, resistance at 1.2740.

EUR - The Euro made a real push to break higher into year end, but of course failed and here we are right back in the range. The 1.1140-50 area is a quadruple top now (dating back to July) and is obviously the key topside level. The 200 day MA (1.0846) is support and maybe that is your new range.

CAD - A combination of year end flow and over extended CAD short positions getting cleared out drove Funds down to 1.3177 last week (it will be interesting to see this week's IMM data) and I admit the move lower went further than I thought it would. I still think market pricing for March looks off for the BOC/Fed. 22bps of cuts priced for the Fed with GDP near 5% and a 3.7% UR with barely 10bps of cuts for the BOC with CAD GDP on life support, a 5.8% unemployment rate, business and consumer sentiment in the dumps and CPI ex-shelter sitting at 1.9%. That just doesn't seem right and I think that gap closes one way or the other and when it does it will put upward pressure on USDCAD. 1.3333 (75 cents) is initial resistance followed by 1.3375.

Good luck.

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