Today's FX Comment

August 9, 2024?

As we head into the weekend a sense of calm has come over the market. Yields are a bit lower, stocks are higher and for FX it was a subdued overnight session. After a volatile week maybe everyone just needs a break.

Equity markets ex-China were all higher in the overnight Asian session. The highlight was the release of Chinese CPI and PPI data and while both were a bit firmer than expected it is safe to say China should be a lot more worried about deflation rather than inflation. PPI printed its 22nd negative number in a row (-.8% YoY) while CPI remains very tame at .5% YoY. China will continue to export disinflation around the globe, at least when it comes to goods (now if only we could do something about shelter and insurance costs).

European indices are all in the green this morning. France's unemployment rate was better than expected while German headline CPI was as expected and sits at a relatively tame 2.3% YoY. That's not terrible news and certainly won't get in the way of another ECB rate cut next month.

Futures point to gains on the open in North America and its pretty incredible when you think about it. The S&P traded down to a low of 5119 on Monday and things looked dire but here we are on Friday with a chance to erase all the losses and end the week higher (I hope I didn't just jinx it!). Axios ran a story noting that on Monday, retail investors didn't panic but actually bought the dip. Maybe market behaviour is changing, in the old days a move like we saw Monday might have led to more selling and calls to "just get me out", now smaller investors saw it as an opportunity to snap up the likes of Nvidia, Amazon and Tesla. Seems like there is still a belief in tech and in the prospects of a soft landing for the US economy.

With respect to that soft landing we heard from Fed member Schmid yesterday (who is a hawk and a non-voter) who said he is not ready to support a rate cut. He pointed out that inflation is still above the official target and the labour market still appears healthy. I think Schmid has lost sight of the fact and inflation and employment are lagging indicators. I suppose it doesn't matter too much what Schmid says, his boss Jay Powell gets it and the Fed Chair wants to erase his transitory mistake. Much better to go down in history as the Fed Chair who engineered the soft landing. Fed rate cuts still coming.

FX thoughts:

JPY - Just over a one big figure trading range for USDJPY today, that is calm compared to recent moves. It is hard to know just how much short Yen positions have been pared back, maybe we'll get a hint when we see the latest IMM data this afternoon. Regardless, to me USDJPY has undergone a shift, it is not buy the dip anymore but rather sell the bounce now. The Fed will be cutting, while the BOJ will be hiking (as long as things are "stable"). Support 144.30, resistance 147.90.

AUD - You can't say definitively that the equity market volatility is done (we'll see what US CPI data next week brings) but for now risk sentiment and stock markets seem to have stabilized. That is typically a good thing for AUD and with the RBA standing apart for its hawkishness I think you buy the dip in the Oz. Resistance between .6585-95 (200day MA at .6598) followed by .6635, support .6485.

EUR - Rangebound with offers between 1.0990-1.1015 and initial support at 1.0870.

GBP - Risk sentiment is improving and that should help give Cable a lift. That being said it isn't working yet today. We're back in a 1.2600-1.2800 range for now but we have a heavy UK data week coming up with employment and inflation numbers released next Tuesday and Wednesday.

CAD - In the absence of any other significant data, the Canadian jobs report and the Canadian Dollar will get the spotlight this morning. Expectations are for a +25k print and the one thing we know, forecasters can't seem to get this one right. We are looking for a bit of a bounce back today after last month's uninspiring -1k number but given the labour pool is increasing and the unemployment rate is expected to tick higher wages should continue to cool and that is more the key for the Bank of Canada (besides when your mortgage payment jumps by 24% a 5% wage hike doesn't really help all that much). I think risk is skewed here, given the market is already short CAD a softer number might lead to less of a bounce in USDCAD than it normally would, especially since the market already has three BOC rate cuts priced in by year end. A stronger print would get the larger reaction as shorts get squeezed, especially in a week where a lot of positions have been pared back elsewhere.

All that being said, I had a peak back at the Canadian August employment numbers going back to 2010, I will note that past performance does not guarantee future returns but it doesn't look great. I am going to leave August 2020 and 2021 out of it as there was a huge covid impact (+415k job gains in 2020, 94k in 2021), if you look at the other 12 results:

- median forecast: +14k

- average print: -4k (yes negative!)

- missed forecast to the downside 9 out of 12 times

- August saw negative job growth 7 out of 12 observations

Maybe some seasonality at play? Of course, now that I have highlighted it, maybe we'll get a huge positive number today....At any rate levels remains the same, support nearby at 1.3720 followed by 1.3680 (and we know mega-support at 1.3600). On the topside we should see offers ahead of 1.3800.

Have a great weekend.

Good luck.