Today's FX Comment

March 6, 2024?

Good morning and happy hump day. JOLTS, ADP, UK budget, BOC, Powell - let's rock!

Ahead of the BOC and the Powell testimony we have a little hint of risk on this morning with equities bouncing and the US Dollar mostly lower to start the session. The National People's Congress continues in China with little in the way of surprising announcements. President Xi stated that China plans major measures to deepen reforms in an "all-round" way while calling for support of the private sector economy and enterprises. I'm really not sure what that exactly entails but risk sentiment did get a lift this morning after the PBOC encouraged support for Chinese firms to list overseas. PBOC Governor Pan also noted that the central bank still had room for cutting the RRR so maybe the potential for further stimulus remains alive and well in China. Asian indices ended the session mixed with the Hang Seng outperforming (+1.7%).

European markets are mostly higher this morning shrugging off news that the German IFO Institute cut its 2024 GDP growth forecast from 0.7% to 0.2%. We have the ECB on tap tomorrow so markets may tread a bit of water ahead of Lagarde but with core CPI cooling rapidly rate cuts are in sight.

Futures point to gains on the open in North America but we all know there is an awful lot on tap today. We start with ADP (which really has not been a great predictor of NFP) then the BOC followed by JOLTS (becoming less impactful but expected to slide back below 9million openings, watch the quits rate which has steadily been grinding lower over the last several months) with the grand finale Fed Chair Powell's testimony in Congress.

It has been a while since we have heard from the Fed Chair (February 4th was the last time) but there has been no shortage of Fed speakers that have stepped up to fill in the void in his absence over the last month. I think by now we all get it, rate cuts are likely this year but just not yet. I can't see the Chair deviating all that much from the message that has been consistently sent by his colleagues but he has sounded more accommodative at times than some other Fed members so no doubt his testimony will be closely scrutinized by the market. Grand standing politicians will no doubt grill the Chair about the timing of rate cuts and ask why rates are so high when inflation (especially as measured by core PCE ) has fallen so dramatically.

A few other notes:

- Axios reports today that the US CEO Economic Outlook Index has jumped with the quarterly report above its historical average for the first time in two years as CEO's feel more confident about the economy than they did in late 2023. Overall, CEO's are expecting stronger sales and more capital investment - maybe it will be a no landing after all for the US economy? That being said the one component of the index that is slowing is employment with hiring plans heading lower which should help contain wage growth.

- Oil has seen a small bounce after the Saudis unexpectedly increased prices to buyers in Asia

- It looks like a Trump - Biden rematch after Super Tuesday, of note it is the first time we have had a Presidential election re-match since 1956 (Eisenhower/Stevenson) back then the sitting President won re-election, I won't comment on this one I'll let you decide who you pick to win

FX thoughts:

JPY - USDJPY is lower this morning after reports suggested "some" attendees at the March BOJ meeting are likely to say lifting the negative interest is reasonable. The "some" has been pared back to "at least one" so it isn't as dramatic as first reported but it still underscores the fact that a policy shift is coming in Japan. We are trading just below support at 149.70, next downside level is 148.60. The reaction in yields post-NFP and CPI will obviously be the key near term driver but the combo of a more hawkish BOJ + Fed rate cuts should ultimately lead to a sustained push lower in USDJPY.

AUD - Australian GDP came in right on expectations last night. Australian Treasurer Chalmers had warned that it would be weak so perhaps the market was prepared for the worst. Chalmers warned again after last night's data that it might be weak going forward but the market doesn't seem to think so with the Oz higher on the session. I still don't think the RBA cuts this year. Support .6455-60, resistance .6570.

EUR - The Euro is trading right on resistance at 1.0870 this morning with more at 1.0900. The EU economic surprise index has been trending higher and maybe the market has been underestimating the Eurozone economy. The ECB will likely hold off on signaling any rate cut tomorrow preferring to wait one more meeting. Feels like we see that 1.09 handle soon.

GBP - I think most of today's UK budget details had been leaked ahead of time so Cable remains in a 1.2650-1.2740 range for now. No change here, core inflation is still on a 5 handle, I'm not sure how/why the market is pricing in a summer rate cut. If the UK economic data manages to hold up, Sterling could be an outperformer.

CAD - Little change in USDCAD overnight which makes sense ahead of the BOC. Obviously, no rate change today and I think Governor Macklem should pull a page directly from the Fed’s playbook and simply say “rate cuts are likely later this year but we are not in a rush, we would like to see more data to ensure inflation is on a sustainable path to our 2% target”. That effectively kicks the can down the road to the April 10th meeting, by then the BOC will have had the luxury of seeing two more sets of employment data and one more each of GDP and CPI. They will also have a better handle on that Spring real estate market they seem so fearful of stoking. The April meeting will include a new MPR with updated projections which will allow the Bank to set the table for a June rate cut.

Of course the Bank may surprise in their statement/presser today.

THE DOVISH CASE

- the economy is clearly operating below potential as per capita GDP declined for a fifth straight quarter

- the unemployment rate has trended higher to 5.7% over the last year and that rate would be far higher (estimated roughly 6.1%) if not for a significant drop in the participation rate

- Mortgage interest costs still make up the vast majority of inflation followed by rent. The BOC has been making more noise lately about the inability of monetary policy to effectively impact shelter costs. BOC Governor Macklem: “You’re not going to solve housing with low interest rates and you’re not going to solve it with high interest rates. We’ve tried both, and we’ve had high shelter price inflation…”. BOC Deputy Governor Rogers: “We’re not seeing the decline in house prices we would expect…interest rates on their own are not going to help us get back to a housing affordability situation or solution...” Maybe the Bank is ready to “look through” shelter inflation when it comes to monetary policy.

- Canadian business insolvencies hit a multi-year high in January

- Core CPI has been declining steadily and was softer than expected last month. It now sits at its lowest level since November 2021 with the BOC expecting inflation to decline to 2.5% in the second half of the year and return to target in 2025. Recall this quote from the Bank’s website:

“Monetary policy actions take time- usually between six and eight quarters- to work there way through the economy and have their full effect on inflation. For this reason, monetary policy is always forward looking and the policy rate setting is based on the Bank’s judgement of where inflation is likely to be in the future, not what it is today.”

Maybe the Bank needs to start cutting sooner rather than later to avoid a hard landing for the Canadian economy

THE HAWKISH CASE

- Core CPI just isn’t close enough to target yet. Sure inflation has been declining steadily and was softer than expected last month but one weaker inflation print doesn’t make a trend. The BOC would like to see more data to ensure CPI is on a sustained path lower before signaling a rate cut

- Unemployment and GDP are still pretty decent. The unemployment rate has risen to 5.7% but is it that bad when you look back at where it has been over the last ten years? 5.7% still looks pretty good in a historical context. Likewise GDP may not look great on a per capita basis but real GDP expanded about 1% faster in Q4 than the BOC forecasted back in January, so not bad versus the Bank’s assumption. Q3 revisions were also better.

- Wage growth remains inconsistent with lower inflation.

- Fears that signaling a rate cut may end up overheating a Spring housing market that is already starting to get hot. A quick internet search brings up the following headlines: “Calgary home sales up almost 23% in February, prices rising”, “February homes sales up by double digits in Toronto, Vancouver and Calgary”, “Toronto home sales up in February from last year as consumers eye rate cuts”. You get the picture, if the BOC is worried about rising home prices stoking inflation then they best not signal forthcoming rate cuts.

Resistance 1.3620, support 1.3520-50 followed by the 200day MA (1.3477)

Good luck.

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