Today's FX Comment

Good morning. The market feels a bit like I do today, tired and limping into the weekend. Overnight Asian equity markets were all lower taking their cue from yesterday's late day selloff in North America. PBOC Governor Pan tried to tell us that all is well reiterating that the risks in the property sector are controllable but I'm not sure the market is fully buying into his optimism at this point. Important week for China next week, the reported Biden-Xi meeting is expected to take place, we have a big economic data dump Tuesday night (IP, retail sales, fixed asset investment) and that same night China gets to potentially tweak monetary policy with their one year MLF announcement. The market is thinking we might get more rate cuts before year end, after this week's softer than expected inflation data out of China maybe the PBOC is inclined to provide more stimulus.

European equities are all in the red this morning weighed down by higher Eurozone yields, the negative sentiment around Fed Chair Powell's comments yesterday afternoon and the thought of potentially higher rates for longer. Jerome Powell said: "If it becomes appropriate to tighten policy further (to bring inflation down to 2%), we will not hesitate to do so”, think about that for a moment, would you expect him to say anything else? Of course if they have to go again to tame inflation they will, but that doesn't mean it is happening. The market will eventually get more and more used to what I see as (mostly) empty threats at this point.

Futures point to a flattish open in North America but it is Friday, negative sentiment is still lingering after yesterday's soft US bond auction and we know often times the market likes to reduce risk into the weekend. The odds might be stacked against stocks today, we’ll see.

FX thoughts:

JPY - USDJPY is pushing back toward the YTD near 151.72 this morning. Friday is a good day for intervention, long Dollar positions might want to be cautious up here.

AUD - The RBA minutes were released last night and the central bank forecasts the cash rate to peak around 4.5% (not far from where it sits currently), they are wrong it will have to go higher. Remember this is the same central bank that said back in 2021 that they wouldn't be hiking rates until 2024, the track record is not enviable. We are right on .6360 support this morning, next downside levels .6315 and .6270.

GBP - UK GDP data was better than expected this morning, the only problem is the bar was set pretty low (GDP M/M: +0.2 % v flat expected, Q3 Preliminary GDP Q/Q: flat versus -.1% exp.). The UK is managing to avoid a recession for the time being but the picture doesn't look rosy with private consumption down -0.4% and gross fixed capital declining -2.0%. I still think the BOE remains between a rock and a hard place. Support 1.2190.

EUR - The Euro is trading higher this morning as EU bond yields firm up and give the currency a lift. The range is 1.0590-1.0800 on the wide.

CAD - Yesterday, BOC Deputy Governor Rogers told Canadians to prepare for higher rates for longer noting "It may be tempting to believe the low rates that we all got used to will eventually come back. But there are reasons to think they may not" and "It’s not hard to see a world where interest rates are persistently higher than what people have grown used to,”. I have to bring it up, this is the same central bank that back in July 2020 told us: “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time,” with governor Macklem adding “If you’ve got a mortgage of if you’re considering making a major purchase, or you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time,". Of course, the Bank embarked upon a? very aggressive rate hike campaign about 19 months later, not really a "long time". I am sure Governor Macklem regrets those words (like Powell regrets transitory) and admittedly forecasting inflation in a post-pandemic world has not been easy for anyone but to me it just serves as a reminder that CB's are not all knowing and that we should take their statements and forecasts with a big grain of salt. I agree with Deputy Governor Rogers, the BOC rate won't be returning to 25 or 50bps anytime soon, we should all hope not, that means the economy is very unhealthy but a sustained period at 5%, very doubtful. 2.5-2.75%, that seems about right and I think it will happen sooner than the Bank forecasts.

One other note, Rogers highlighted yesterday the fact that mortgage delinquencies were lower than pre-pandemic levels in Canada. However, earlier in the week, Rogers was also very critical of negative amortizing mortgages suggesting banks should forbid the practice. Recall, at several banks negative amortization now makes up about 20% of mortgages. Change that practice and I wonder how those delinquencies will look. The BOC can't play it both ways. Higher rates for longer? Let’s not forget Canada is on the verge of entering at minimum a technical recession, actual GDP has been far lower than BOC forecasts and unemployment is now .8% off the lows and is higher than pre-pandemic levels. The BOC and the Fed are both very likely on hold.

For today, oil looks to have found at minimum a short term bottom, it is all about stock market performance/overall sentiment today for the Canadian Dollar. Resistance 1.3830 and 1.3880, support 1.3750 and1.3680. More important for sentiment: next Tuesday's US CPI print.

?Have a great weekend. ?

Good luck.