Today's FX comment

Today’s FX Comment?

Good morning. Tonight is the big night, my wife and I are off on the mega Costco run to stock up for the holiday season. Everyone needs that five pound tin of Walker’s shortbread cookies right?

The November stock market rally might be taking a bit of a breather today. Overnight, Asian indices were mixed with the Hang Seng leading the way lower. Quite a difference, the S&P is up +18% YTD while the Hang Seng is down -12% and hovering just above the lows of the year. PBOC Governor Pan Gongsheng remains optimistic noting greenshoots in China's PMI, I suppose we'll see when the data is released tomorrow night. In the meantime, property indices continue to drop despite China releasing a series of measures to encourage financial industry support for the troubled real estate sector. The glass half empty view dominates for the time being with concern that China's push for banks to provide unsecured loans to property developers will lead to huge financial losses weighing on sentiment.

European equity markets are all in the red this morning despite improving consumer confidence data out of France and Germany. Futures point to a lower open in North America but its a long day and we may find equities are supported on dips as anyone who missed out on this month's rally looks to jump in believing the Santa Claus rally will continue into year end. ?

FX thoughts: I think we need to pay attention to a few things

- The US Dollar has been supported by better US economic data and Fed rate hikes this year, the data has slowed of late and the Fed looks like they are done hiking

- Bloomberg notes the latest IMM data shows leveraged names net long US Dollar positioning has risen to the highest level since February, 2022

- DXY is trading (and holding) below the 200day MA for the first time since August

- there is expected month end US Dollar selling

- DXY average returns in the month of December: -1.56% (5 year), -.82% (10year), -.74% (20 year)

Looks like the Big Dollar might be vulnerable.

JPY - USDJPY took a look below 148 overnight before rebounding to essentially unchanged on the session. Plenty of talk out there about the BOJ moving away from negative rates early on in 2024 and doesn't it feel like the most anticipated (potential) 10bp rate hike of all time? By the time it actually happens it will be a big let down. To me the larger drivers: positioning > the market remains quite long USDJPY and rate spreads > US/Japan 10 year yield spread points to USDJPY somewhere closer to 146. Interesting side note: it is being reported that next week Japan's top business lobby is set to discuss the? negative impact of a weak yen. Important as in the past the group has favoured a softer Yen to boost exports. This is a real shift in sentiment around the currency. Support 147.40.

AUD - Australian retail sales data was a bit softer than expected but the market has mostly ignored the number. The focus remains on a more hawkish sounding RBA with Governor Bullock noting last night that Australia's inflation path is similar to overseas (stickier), that second round price effects are evident in the economy and that demand had been stronger than the RBA had anticipated. More rate hikes coming here. We have reached the initial .6620 target but I still like buying dips. Next topside level is .6725.

EUR - Slightly better consumer sentiment data combined with ECB speakers who continue to tell the market it is far too early to be discussing rate cuts have given the Euro a tiny boost this morning. Topside target is 1.1040, support 1.0830.

GBP - BOE Deputy Governor Ramsden sounded more hawkish this morning reiterating the stance that rates need to stay restrictive for an extended period noting that services inflation was stickier than expected. Old resistance at 1.2590 is now initial support, topside level nearby at 1.2655 followed by 1.2740.

CAD - Last week we sent out a note highlighting how short CAD positions on the IMM looked extreme and how in the past this had been a decent counter-indicator and pointed to a lower USDCAD. We are giving ourselves a little pat on the back today with USDCAD having moved 160 pips lower and trading below 1.3600 this morning. The latest IMM data was released late yesterday and to me CAD short positions still look a bit extreme. I don't know too many people who are bullish on Canada at the moment, in fact I would say most of the talk around the currency has been quite negative, combine that with stretched shorts and some potential (I stress potential) month end US Dollar selling and you have a recipe for a washout move lower in USDCAD. When everyone is leaning one way, watch out. Support nearby at 1.3580 followed by the 200day MA (1.3518). I think we'll find sellers on rallies in USDCAD toward 1.3640 now.

Good luck.