Today's FX Comment

November 5, 2024?

Good morning. Well, the day we have all been waiting for is finally here. The Maple Leafs first home game of the season against the dreaded Boston Bruins...Oh and of course the US election. I am going to the game tonight just so I spend 3 hours less time watching CNN....

Ahead of the vote, equities and overall risk sentiment are holding their own. Overnight Asian equity markets ex-Australia (more hawkish sounding RBA weighing) all traded higher led by 2%+ gains in Hong Kong and mainland China. China's Caixin services PMI data was stronger than expected (21st month of expansion in fact), reminding the market that maybe all the stimulus we have seen out of China is starting to have a larger impact. Chinese premier Li Qiang also helped sentiment noting that China has ample room for fiscal and monetary policy to ramp up countercyclical adjustments. Even former (and maybe future?) President Trump got in on the act saying that he would slap 25% tariffs on China unless fentanyl stopped flowing across the US border - hey on the bright side, 25% is better than the 60% he has been talking about.....

European indices are all in the green this morning but overall gains have been very small as traders sit on their hands waiting for the result of the Presidential election. The outcome for Europe seems pretty binary (at least initially), Harris = no tariffs = good, Trump = tariffs = not so good.

Futures point to gains on the open for North America and by now we know the scenario. The latest national poll I have seen (from NBC) has Trump and Harris tied at 49% each with 2% undecided (time to make up your mind). We know the key swing states are Pennsylvania, Nevada, Georgia, North Carolina,? Wisconsin, Arizona and Michigan. Trump is up in the polls in 3 states, Harris two with Pennsylvania and Georgia a toss up. Too close to call. Pennsylvania seems to be the key and we probably won't know who won it until maybe tomorrow afternoon.

For the market things seem pretty straightforward, a Trump win and the "Trump Trades" we have seen put on over the last five or six weeks carry on, stocks up, yields higher, US Dollar higher (although the market is already pretty long the Big Dollar). A Harris win would be more of a surprise for the market and probably cause a larger reaction. Yields lower, US Dollar a lot lower and stocks up (yes, stocks up with a Harris win, after all equities are at all time highs under Biden).

Regardless of who wins, the Fed will be cutting rates later this week and given last week's softer JOLTs data, downward NFP revisions and ISM manufacturing data that is near 18 month lows, they are probably going again in December. The Fed wants to nail that soft landing and that is a good backdrop for stocks no matter who wins.

Final thought: US GDP is running at 2.8%, unemployment is still pretty low at 4.1%, headline inflation has dropped to 2.4% and stocks are at/near all time highs. To top it off, the Fed is cutting rates and a soft landing looks in sight.? Not bad, maybe corporate tax cuts aren't needed? Maybe tariffs aren't needed either? Why rock the boat and mess with an economy and stock market that looks pretty good right now.

FX thoughts: What can we say, the next 24-48 hours comes down to who is the next President (if we know who wins by then)

JPY - Trump win=higher yields = higher USDJPY (or at least you would think). The opposite if Kamala wins. In the end, the BOJ will be hiking and the Fed will be cutting. Long USD Put spreads are worth a look. Same levels: Support 150.80, resistance 153.90.

AUD - The RBA held rates steady as expected last night but overall leaned hawkish with stronger wording on inflation in the statement. The CB was pretty straightforward stating "underlying inflation remains too high", it doesn't get much clearer than that. Governor Bullock also noted services inflation as being too high and that the last part of bringing down inflation is not easy saying that rates would need to stay restrictive for some time. You know I like long AUD and I think Call spreads are the safest way to get/stay long. We are hung up near the 200day MA (.6629) for now, next topside level is .6690.

EUR - Harris win = a move toward 1.1200 (eventually), Trump win = a move to 1.0670 initially. Even if Trump wins I don't think slapping tariffs on the EU will be as easy on the US as he might think. Europe has had time to prepare for a potential Trump win this time around.

GBP - A BOE rate cut is widely expected this week and that should help a UK economy that seems to be doing ok at the moment (services and composite PMI data a bit better today). That being said UK yields do remain perky (10 year yield at 4.5% not far from decent resistance at 4.75%) and a prolonged period up here will eventually weigh on economic growth. Was the recent UK budget really that bad? Maybe time to buy some bonds?? Support 1.2870, resistance 1.3040-50 in Cable.

CAD - We have the BOC minutes later today but I think they will fall into the "overshadowed" category. We know that CPI ex-shelter is almost non-existent in Canada, we also know that government cut backs on immigration and foreign students are already starting to put some downward pressure on rents. Unemployment has ticked higher and GDP while positive isn't exactly lighting it up. Governor Macklem has told us the Bank is open to another 50bp rate cut and the market already has about 40bps priced in for December. Tough for the minutes to really surprise. A more aggressive rate path is the best thing the BOC could do, get toward neutral faster and give the Canadian economy a helping hand. In the meantime, the market has the short CAD trade on in size and watch out below in USDCAD if Harris manages to win. Support between 1.3830-50, offers remains solid toward 1.3950.

Good luck.