Today's FX Comment

April 29, 2024?

Good morning, I hope you had a great weekend. As we kick off the week, most of the action came out of Asia. It is Golden Week in Japan and the Yen has grabbed the gold medal today as the top performer in the FX space. The picture didn't look rosy initially with USDJPY trading above 160 to start the session but a little bit of intervention (not officially confirmed) never hurts and a few rounds of aggressive selling by a number of Japanese banks turned USDJPY lower in a hurry. Japan's top currency official Masato Kanda would no confirm intervention but as the old saying goes, if it looks like a duck, walks like a duck and quacks like a duck, then it just may be a duck. Sure does look like intervention. Elsewhere in Asia, equity markets all traded higher overnight. Of note, property indices in mainland China all rose strongly today, while the Hang Seng is close to bull market territory rallying almost 20% from its January low. Tesla shares are also up about 10% pre-market as Chinese authorities removed restrictions on its cars after passing the country’s data security requirements. The move raised expectations that Tesla’s Full Self Driving software would soon be available in the country.

European equity markets are mostly higher this morning although gains have been a bit more tepid. The ECB's Wunsch noted that the central bank should be cautious about a July cut and pushed back on market expectations of three cuts this year. EU economic sentiment data was also a touch weaker than expected this morning. The risk backdrop was brightened on reports that the US aims to mediate a peace deal between Israel and Hamas. I hope for the best, but we have heard this type of report previously without much success so perhaps best to keep expectations lowered for now.

Futures point to gains on the open in North America with Tesla's pre-market move no doubt helping. Today we get the US Treasury borrowing estimate and at this point instead of a number, maybe they should just say "a lot". We have another heavy week ahead, earnings wise we have Amazon and AMD tomorrow, and of course Apple on Thursday. We have the Fed on Wednesday but I think we all know by now, it is higher for longer. The market is down to 36bps of cuts for the remainder of the year and with the Fed maintaining their easing bias (or at least expected to) it is hard to see that dipping much lower ahead of Friday's NFP. The real question: we saw weaker US data last week and is it the start of a trend? A softer NFP print (if we get one) on the heels of weaker than expected GDP will have the market questioning the strength of the US economy.

FX thoughts:

JPY - Just last Friday BOJ Governor Ueda noted that a weak Yen was not having big impact on trend inflation and Finance Minister Suzuki stated that the FX trend may depend on how long rate differentials persist.? Well, I guess they didn't like that trend persisting above 160 overnight and stepped in to stop the bleeding in Yen. I don't think the market is done testing Japanese authorities and I would expect USDJPY to grind back higher in the coming days/weeks. That being said, I don't think last night's intervention was a one and done either. If the recent move follows the pattern we saw back in 2022, the BOJ will need to intervene three of four times before the market is through testing higher.? I think: the market is very short Yen, the market has gone from almost 160bps of Fed cuts at the start of the year to 36bps today, the US data has shown early signs of slowing, and Japan is intervening. Maybe it is finally time to look at downside USDJPY trades.

We looked at these last week, maybe time to re-price:

1. Long a 4 month (August 28) 150 USD Put / Short a 145 USD Put AKI 134.50. Premium = 168 Yen pips.

- Max gain = 1549 Yen pips

- 145 Put AKI 134.50 is worth approximately 61% of the vanilla 145 USD Put but gives you another potential 1050 pips of upside

2. Long a series of Digital Puts

long 150.00 digital put, expiry June 28, 2024, payout 330k USD (21% of payoff)

long 147.00 digital put, expiry August 29, 2024, payout 330k USD (20.3% of payoff)

long 144.00 digital put, expiry October 29. 2024, payout 330k USD (18.3% of payoff)

- Total premium 196k USD (20% of payout)

- Spreads your potential gain out over a longer horizon period

AUD - Onward and upward for the Oz and why not. Inflation remains above the RBA's target making rate cuts unlikely, unemployment remains low, wage growth healthy, metals prices are ripping and equities are looking decent. We came up just short of our .6590 resistance level overnight, after that its .6635.

EUR - The comments from the ECB's Wunsch have lent the Euro some support as has some very slightly hotter than expected inflation data out of Germany this morning. I think we'll see bids bumped up to 1.0630 now, same resistance levels 1.0730 and 1.0785.

GBP - Politics are front and centre in the UK as PM Sunak's Conservative party remains under pressure. That being said I think the market is used to some political instability in the UK by now.? I still think market pricing of BOE rate cuts remains a bit aggressive. Support 1.2470, resistance 1.2580.

CAD - The Canadian Dollar is at the bottom of the G10 pack this morning in uninspired trading. If equities can hang on to or build on early gains, we should see a continued grind lower in USDCAD. 1.3600-20 was good resistance on the way up and it should now be very good support and might be tough to crack ahead of Wednesday's FOMC. Remember, we do not have the Canadian employment report this week, we have to wait until May 10th. In the absence of key data this week it will be all about equity market performance and overall moves in the US Dollar to drive direction for USDCAD. Jobs data May 10 and CPI May 21 will tell us whether or not we get a June BOC rate cut. We should find sellers on a bounce toward 1.3680-85 followed by 1.3720.

Good luck.