Today's FX comment

September 19, 2024?

Good morning. We noted a couple of things in our comment yesterday morning:?

1. 50bps + a cautious Powell who tries to keep the market from pricing in too aggressive a path > market rallies, USD sells off but maybe it reverses on a buy the rumour/sell the fact move (that was pretty much what happened and that's also the sound of me patting myself on the back)

2.? When all is said and done and the dust finally settles: we know it is not one and done from the Fed, we will have many more rate cuts coming in the pipeline....Add in the fact that Chair Powell would absolutely love to nail that soft landing and I think you have a more accommodative Fed moving forward. Decent US data + Fed rate cuts = soft landing. Good backdrop for stocks and overall risk.

Well, the dust seems to be settling today and the market has voted, a more dovish Fed and a greater probability of a soft landing = risk on. We can focus on the fact that Powell thinks the neutral rate will be higher now then in the past but I don't think that should come as a huge surprise. Just prior to the pandemic FF was 1.75% so yes, I think it is likely the neutral rate will be higher as well. Let's face it though, there are a lot of rate cuts to come before we get there and really, the neutral rate is a pretty theoretical thing isn't it. I wouldn't be overly concerned. The bottom line is the US data remains decent and the Fed is cutting (and we know they will continue to cut), that' seems like a healthy backdrop for risk.

Overnight trading can be summed up in two words: risk on (or "buy stocks" take your pick). Asian indices were up across the board led by 2% gains in both Japan and Hong Kong with Australia's ASX hitting a record high. Chinese property stocks enjoyed healthy gains and the Hang Seng mainland properties index ended the session up +6% with Chinese press reports noting that the Fed's 50bp cut gives the PBOC more options with respect to rates/stimulus.

European equity markets are flying high as well this morning, cheered by the Fed's move yesterday afternoon. We also had a couple of dovish comments from the ECB (Centeno - "ECB might have to accelerate rate cuts to avoid inflation falling short of forecasts") (Knot "further room for rate cuts if inflation outlook held") that have helped to lift sentiment.

Futures point to gains on the open in North America and don't August 5th (the S&P traded to a low of 5119) and September's poor start (S&P down 4.2% in the first week of trading) both seem like a distant memories right now. We all know September is typically the worst month for stocks and there is still a week and a half to go so we're not out of the woods yet, but yesterday's Fed rate cut may make history difficult to repeat itself. Keep in mind, the period from October through the end of December tends to be the best quarter for equities, maybe super-charged by more Fed cuts/soft landing this year?

FX thoughts:

JPY - We have a pretty big 1-2 punch out of Japan tonight with CPI data (headline and core both expected to remain well above the BOJ's target at 2.8 and 2.7% respectively) followed by the BOJ rate decision. No change is expected tonight so it will be more about the tone from the BOJ but with healthy wage growth and above target inflation you would have to expect the Bank to keep rate hikes on the table. I still like selling rallies here. 137.50 looks like a downside target while 143.70 is resistance.

AUD - Australian employment data easily topped expectations last night however all the job gains were part time tempering some of the good news. Still, the unemployment rate remains low, the participation rate hit a record high and the employment-to-population ratio rose to a near record 64.3%. Australia's Stats Agency said overall there is continued relative tightness in the labour market and certainly nothing last night will make the RBA any less hawkish. Copper is up, iron ore has stabilized and stocks are on a roll all should be supportive of the Oz. Watch for a weekly close above .6800, next topside level is .6900 (double top from summer 2023).

EUR - The market isn't pricing in much chance of an ECB rate cut in October, I think they should be. For now though it is more about the Fed and broader US Dollar weakness. 1.1155 is a pivot, 1.1200 is next resistance.

GBP - The BOE kept rates steady as expected this morning and the vote at 8-1 leaned a bit hawkish. The contrast between the Fed and BOE is pretty apparent and I remain upbeat on the near term prospects for Sterling. 1.3360 is the next topside target, keep buying dips here.

CAD - Very simple thought: When you look at where headline CPI sits, is seems quite clear the BOC is overly restrictive. Headline CPI is right on target at 2%, core median is 2.2% (close enough), CPI-ex mortgage interest costs is 1.2% while CPI ex-shelter is .5%. The BOC minutes yesterday said some members see inflation risks as balanced while others are concerned with downside risk to inflation. It doesn't sound like anyone is too concerned about upside risks to CPI. In the meantime, unemployment has steadily risen to 6.6%, GDP was flat in June and July, retail sales have been negative two months running, you get the picture. The Fed's 50bp rate cut yesterday was a gift for the BOC, it opens the door to 50bps from the Bank next month and they should (and will) follow through. Broader US Dollar weakness weighs on USDCAD, but I see CAD weakness on the crosses continuing (GBPCAD and AUDCAD are obvious choices). Old range 1.3600-1.3850, new range 1.3400-1.3700.

Good luck.

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