Today's FX Comment

May 31, 2024?

Good morning and TGIF. I was going to say the highlight of the day today will be the core PCE and Canadian GDP data but we all know that it will be the Trump press conference at 11am ET. I am sure someone has already made up a drinking game, you have to do a shot every time he says the word "rigged".....

Ahead of core PCE (still the Fed's preferred inflation measure) yields area touch higher and equities are doing their best to post some gains. Overnight, Asian indices were mixed with the Nikkei powering higher (+1.1%) while the Hang Seng underperformed (-.83%), Chinese PMI data was softer than expected with the manufacturing number slipping back into contractionary territory for the first time in three months. This despite recent support measures from the government. The data likely serves as a reminder that while the Chinese economy may be past its worst days we probably aren't entering any period of gangbuster growth either.

European equity markets are slightly higher this morning with the FTSE outperforming. UK housing and sentiment data were better than expected while Eurozone inflation came in a bit hotter this morning. It still won't derail and ECB rate cut next week though. I would say on balance, the European economic data has been better lately and the ECB and BOE looked primed to cut (maybe August for the BOE). Better data and lower rates are a supportive combo in my view. Certainly better than the stagflation fears we once had with respect to Europe.

Futures point to a lower open in North America but we'll see what today's data brings. Forecasters are usually pretty good with the PCE number and the range of estimates today is pretty tight, the low estimate is 2.7%, the high is 2.8%, not a lot of grey area there. Every tenth matters though, a 2.9% print would be scary, that one tenth would mean inflation has reaccelerated and it would likely torpedo stocks heading into the weekend. A 2.7% print means progress is being made on inflation, buy stocks. At the end of the day, the Fed's preferred measure is on a 2 handle. When I hear people talk about potential stagflation I think Core PCE is 2.8% that really doesn't add up to the inflationary part of stagflation. When I hear people talk about another potential Fed hike, I think Core PCE is on a 2 handle, the Fed won't be hiking again. That last .8% to get from 2.8 to 2 will be tough but we're in a much better place with respect to inflation then we were a year ago (when it was around 4.7%).

FX thoughts;

JPY - We know now that Japan has spent about $62bio intervening to support the Yen. Guess what, they will be ready to spend even more if needed. Tokyo CPI data was as expected, Japanese retail sales were better while industrial production was softer but is expected to rebound sharply this month thanks to increased auto production. On balance, decent data. Watch for the BOJ above 157.85, support 156.30 and 155.25.

AUD - The Oz has pushed back higher once again this morning. Same story here the RBA at minimum has to lean hawkish, the Chinese economy might not be lighting it up but it does looks like it is slowly turning higher and while metals are off their recent highs prices remain elevated. That is all supportive for the AUD, higher equities today would be the missing piece of the puzzle. .6735 is the next topside target, support .6580.

GBP - Business sentiment data released this morning hit its highest level since 2015 while UK housing data showed a faster than expected acceleration in price increases. Maybe the BOE doesn't need to be in such a hurry to cut rates after all, maybe UK rates aren't as restrictive as everyone thought or maybe the neutral rate is higher than expected. I'm not sure but the UK data has been holding up and maybe a Labour win and the prospect of warmer relations with the EU will be another plus here. Still trading in the 1.2600-1.2800 range for now but dip buyers might become more aggressive.

EUR - EU inflation data was hotter than expected this morning. It won't derail a cut next week but it will make it easier for the ECB to make it a "hawkish" cut and remind the market rates are not on a pre-determined path. Support 1.0810 and 1.0770, topside target is 1.0945.

CAD - We have Canadian GDP data up shortly and as always it seems a bit stale (it is for March after all and here we are with June starting tomorrow). The bar has been set pretty low today with expectations for a flat MoM print and the trend has not been great with the monthly GDP print steadily sliding since the start of the year. Add in retail sales which have been negative three months running and all those mortgages which keep renewing at higher levels eating up more disposable income and I think you have a recipe for further deterioration in the economy. Watch for the flash estimate for April, watch for residual US dollar selling into month end as well. You know how I feel, the Bank should just get cutting next week, today's data might tell the tale. 1.3600 is a pretty big support level, on top we're back to 1.3665 and 1.3730.

Have a great weekend.

Good luck.