Today's FX comment

November 1, 2023?

Good morning, and happy November. Remain upbeat, after all things can't get much worse than October (or the past three months) can they? Positive thoughts as we kick off the month of November:

- the S&P has not had four consecutive losing months at any point in the last ten years

- November has posted the second best monthly returns for the S&P over the last five and ten year periods (July has been the best month) averaging gains of 4.1% over the last five years and 3.2% over the last ten

- November has been a positive month for stocks nine out of the last ten years

The odds seem to favour equities this month....

Overnight, Asian indices were mostly higher this despite another set of weaker PMI data out of China with Caixin manufacturing PMI underperforming and sliding back into contractionary territory. Not to fear though, China's two day central financial meeting wrapped up and President Xi has promised to: prevent financial risks and improve the financial system, keep monetary policy prudent and set up a system to resolve local government debt risks. Xi added China will provide more funds for innovation, hi-tech manufacturing, green technology and small-to-medium sized companies. It all sounds good but as we have become used to with respect to Chinese economic policy and stimulus, details were scarce.

European equity markets are pretty flat this morning, treading water ahead of this afternoon's Fed meeting while futures point to a weaker open in North America. Ahead of the Fed we have ADP data (despite a reported methodology change it doesn't seem to be any better correlated with NFP), JOLTs jobs data (more prominent over the last few years but the survey response is so low now it probably isn't as reliable as before) and ISM data (still matters).

The main event will of course be today's FOMC but the market is pricing in pretty much a zero chance of a rate hike and with no new dots to fret over it will be all abut the Powell press conference and really what can he say that he didn't already cover in his economic outlook discussion less than two weeks ago. If anything, since then it feels like sentiment has deteriorated and of course stocks have declined further. By now I think we know the story anyway: progress has been made on inflation but it remains too high, the Fed is resolute in bringing inflation back to target, the Fed thinks they can be patient at this point and let the impact of their prior hikes play out but will not hesitate to increase rates again if needed to return inflation to target. Bottom line: the Fed is done hiking but Powell won't take the threat of another potential hike off the table today.

On another note: big money managers run in packs. First it was Bill Ackman talking about covering his bond short, then it was Bill Gross talking about a US economic slowdown and the notion that higher for longer is yesterday’s mantra while buying SOFR futures, today it is Stan Druckenmiller's turn saying he has a massive bullish position in two-year notes as he’s become more concerned about the economy. Maybe we should start to pay more attention.

FX thoughts:

JPY - USDJPY looks like it is getting more used to dealing above 150 but I'm not sure long Dollar positions should get too comfortable. Since peaking at about 415 bps two weeks ago the UST/JGB 10 year yield spread has drifted lower to about 394bps this morning which also points to lower USDJPY (the correlation has been very strong). You have also been warned about intervention again as Japan's top FX Diplomat Kanda stated that FX moves could not be explained by fundamentals and that speculation seems to be the largest factor in driving USDJPY higher. You can argue with him, I mean the Fed hiking this year while the BOJ has done little is rather fundamental but his focus on the speculative nature of the move says intervention is a step closer. Still time to get some 6 month downside USDJPY trades on.

AUD - Australian building permits data were weaker than expected but that has been offset by the higher iron ore prices we have seen lately. Bottom line here: inflation remains too high and the RBA needs to hike again. I think they go next week. Support .6270, resistance .6360 and .6420.

GBP - UK house price data was a bit better than expected this morning with prices actually rising MoM, that being said they were still down more than 3% YoY. Support around 1.2110 continues to bend but not break but it feels like it is a matter of time before we test lower. With core CPI running above 6% the BOE should probably be hiking tomorrow but at this point it simply feels like they are hoping inflation will head lower. Hope is never a strategy. Sell rallies here.

EUR - With have had a few brief forays outside the range but I think you keep trading 1.0500-1.0610 for now.

CAD - The Canadian Dollar just can't seem to catch a break at the moment with both equities and oil trading lower over the last month and some softer Canadian economic data to boot. The market has gone from pricing in BOC rate hikes at the start of October to pricing in cuts now which I think is correct but the move has probably gone far enough at this point. It will be all about Powell today and broader US Dollar moves/overall risk sentiment post-Fed. Resistance right here around 1.3880 and I am sure we will run into sellers on a 1.39 handle all the way up to 1.4000.

Good luck.

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