Today's FX Comment

January 30, 2024?

Good morning. The market seems about as slow this morning as the Toronto subway crawling down line 1. I suppose we should expect the market to tread some water ahead of earnings releases from Microsoft and Google after the bell today and of course ahead of tomorrow's FOMC.

Asian indices were mixed overnight with most markets relatively flat with the exception of the Hang Seng and stocks in mainland China which once again came under selling pressure. Chinese authorities can talk all they want about rescue packages, they can ban short sales and order state backed funds to buy securities, they can even cut reserve ratio requirements but right now not much seems to be helping the stock market. Evergrande's court ordered liquidation continues to weigh on sentiment with property shares notably lower. China's 10 year bond yield also hit its lowest level since 2002 overnight as the market expects further rate cuts. Some people are talking about buying the dip in stocks in Hong Kong and China but right now it feels like trying to catch a falling knife, not recommended.

European indices are all in the green this morning playing a bit of catch up to yesterday's late day North American rally. Euro zone GDP growth was mixed with slightly better numbers out of Spain and Italy while Germany managed to avoid a technical recession after an upward revision to the Q3 number. Overall GDP remains uninspiring but with EU inflation falling pretty quickly, maybe the market is more focused on potential ECB rate cuts more than anything.

Futures point to a slightly lower open in North America, maybe a little profit taking ahead of a heavy earnings calendar and tomorrow's FOMC. Certainly earnings and maybe more importantly forward guidance from big tech (Microsoft and Alphabet kick it off after the bell tonight) will set the tone for February. As for the Fed, we all know rates will remain steady and they will likely drop their hiking bias as well. Four voting members have changed effective this meeting and with the two most hawkish Fed members Kashkari and Logan no longer voting you would have to say the makeup of the Fed has become a little more dovish.

It will really come down as it often does to the tone from Chair Powell. I am sure he doesn't want to drive any irrational exuberance but the chair has to admit: core PCE has trended steadily lower over the last sixteen months from 5.5% to 2.9% so progress on inflation has definitely been made. The Chair also has to admit that with 6 month annualized core PCE sitting below target at 1.9% (with three month even lower at 1.5%) rates might be starting to look rather restrictive. At the end of the day, Powell will probably remind us it is about the data, but as former Fed member (and former hawk and the one Fed member who was most correct over the pandemic period) James Bullard notes: "Inflation on a 12-month core basis could get to 2% by the third quarter of this year......They (the Fed) don't want to get into the second half of 2024, and inflation’s already at 2% and you still haven't moved the policy.....That would be too late.” The market is pricing in a 50% chance of a March Fed rate cut, that seems about right and I don't think Powell pushes back all that much tomorrow.

FX thoughts:

JPY - Softer US yields continue to cap USDJPY with the pair little changed this morning.? I like to sell rallies here, the BOJ and the Fed are heading in different directions and Powell might confirm that tomorrow.? Resistance between 148.35-50.

AUD - Australian retail sales were softer than expected overnight but the government's bureau of statistics admits they need to work on some seasonal adjustments with spending front-loaded to Black Friday. The more important number will be this evening with the release of inflation data. The core number is expected to decline significantly to 4.3% from 5.2% but even so, with employment quite strong, decent wage growth and house prices holding up can the RBA even be thinking about rates cuts with core inflation running hot. Support .6575 and .6530, resistance .6620 and .6690.

EUR - EU GDP came in at +.1% YoY, hardly inspiring but at least it's positive and with core inflation cooling rapidly maybe the Eurozone has dodged a bullet and managed to avoid stagflation. No matter how much pushback we get from various ECB members I think the central bank is very ready to cut rates and in the end I think that will be a positive for economic growth and for the Euro. 1.0840 support is hanging in there for now, maybe best not to get caught short ahead of tomorrow's FOMC.

GBP - Cable continues to bounce around in a 1.2650-1.2740 range for the most part. UK mortgage applications and credit data came in weaker than expected this morning weighing on Sterling and giving something for the BOE to think about ahead of their meeting this week. With core inflation running far too hot I think it is far too early for the central bank to even think about turning dovish.

CAD - USDCAD has the briefest test of a 1.33 handle overnight before bouncing. Maybe we see some month end related selling of USDCAD that will keep a lid on Funds ahead of the FOMC but really it is all about reaction post-Powell and broader moves in the US Dollar. I think the BOC and the Fed both end up cutting rates pretty much in lock step this year. Support 1.3380, resistance 1.3470.

Good luck.

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