Today's FX Comment

March 20, 2024?

Good morning. "Twas the night before the Fed and all through the market things were fairly quiet...” Overnight, Asian indices were mostly higher following the decent handoff from North America. Japan was closed for a holiday, which gave the market the green light to sell Yen without intervention fears I suppose. In an expected move China kept both their 1 and 5 year loan prime rates unchanged.

European equity markets are mostly lower this morning although losses are fairly tame. More like markets are treading water pre-Fed. We saw weaker than expected CPI data out of Canada yesterday and the positive inflation news continued this morning with softer than expected numbers out of the UK. Elsewhere ECB chief Lagarde reinforced June as the timing for the first rate cut noting that the ECB cannot wait for all the data to begin the rate cut process due to the fact that data is backwards looking and delayed. I wonder how the Fed feels about that?

Futures point to a flat open in North America which I guess makes sense ahead of this afternoon's FOMC. As far as the Fed goes we know that rates will remain unchanged and we know that it is pretty likely that they will retain a neutral bias. The big question is around the dots and is it still three cuts this year or two (they matter, even though Chair Powell seems to downplay them). Certainly, it seems to be a close call. Here is what the Fed has to weigh:

NFP > the most recent release showed +275k job gains, but that was offset by a two month downward revision of -167k, still solid job growth but the downward revisions make it less than spectacular

> the unemployment rate ticked up to 3.9% the highest level in two years

> AHE was softer than expected at +.1% MoM

GDP > slightly softer than expected but still very solid at 3.2% YoY

Weaker than expected data over the last few weeks:

- Retail Sales

- Durable Goods

- Chicago PMI

- ISM Manufacturing

- ISM Services

- Factory Orders

- JOLTs

- Michigan Sentiment

Since hitting the YTD high on Feb 13, the US economic surprise index has slid noticeably

CORE PCE > has ticked very steadily lower:

July 2023 = 4.2%

August = 3.7%

September = 3.6%

October = 3.4%

November = 3.2%

December? = 2.9%

January = 2.8%

Clearly progress is being made, the Fed's forecast in the most recent SEP for Core PCE this year is 2.4%, we're getting closer. On the other hand Core CPI has been stickier and remains at 3.8% YoY, still it has been slowly grinding lower since peaking at 6.6% in 2022. I suppose it may come down to how much weight the Fed puts on PCE versus CPI, they have been very clear that their preferred measure is the Core PCE figure. We also know that the shelter weighting in CPI is approximately double what it is in PCE (roughly 33% of CPI versus 15% in PCE and shelter makes up 42% of Core CPI) so I guess you can obviously put down a lot of the difference between Core PCE and Core CPI to those shelter costs. So what will it be, stick with Core PCE and three cuts or let the much larger shelter component of Core CPI lead the Fed to change those dots to only 2 cuts this year

The market is pricing in around 72bps of cuts this year way down from 160 at the start of 2024 and inline with Fed projections (at least for now). I'm sure the Fed is pleased with that. Yields have also risen steadily since the start of the year (10 year +40bs, 5yr +44bps) again, I'm sure the Fed is ok with that. If I had to guess I would say they stick with three cuts for now, if that happens equities probably breathe a sigh of relief, risk bounces and the US Dollar sells off. A more hawkish shift in the dots and you have to think the number of rate cuts the market prices in will drop to 63-65bps, stocks feel some pressure and the Big Dollar bounces. Then again the market kind of feels like it is expecting a more hawkish outcome, I wonder if some of that is already priced in.

FX thoughts: all about broad US Dollar moves post-Fed

JPY - Japan was out for a holiday and it seems like the market is content to probe higher looking for an intervention level. Depending on the result post-FOMC we might find one sooner rather than later. We are trading right on resistance at 151.70 this morning, next level is not far away at 152, watch for intervention....

AUD - We have Australian employment data later tonight, maybe that will let us know if the RBA was right to drop their hiking bias earlier this week. Support .6480 and .6440.

EUR - Lagarde sounded a bit more dovish this morning, but really it is nothing new we should expect the first ECB rate cut in June. Ultimately I think rate cuts that help spur European economic growth will be a good thing. Remember when we all thought it was stagflation for the EU? We are right on support at 1.0840 this morning we should see more bids around 1.0800.

GBP - UK inflation data was a bit softer than expected this morning with headline down to 3.4% YoY. There are still a couple of problematic things: core CPI is still much hotter at 4.5% YoY and services inflation was hotter than expected at 6.1% YoY. Still most analysts think inflation will continue to cool and the market is still pricing in a summer rate cut from the BOE. It still feels aggressive to me. Back in the 1.2650-1.2740 range for Cable for now.

CAD - We know that after yesterday's inflation data a June BOC rate cut is far more likely. CPI ex-shelter is running at 1.3% YoY and across the country all provinces have CPI ex-shelter at 2% or below. The last time the BOC's policy rate was as high as it is now with so many provinces with CPI ex-shelter inflation below 2% was in the early 1990s, we know that was not a great time for the Canadian economy. I think the longer the BOC holds off on cuts, the far greater the probability of a hard landing here in Canada. USDCAD is bumping up against the 1.3600-20 resistance area once again this morning and depending on the Fed this afternoon maybe we break higher or maybe that area cements itself as the sell zone. 1.3520 is initial support.

Good luck.