Today's FX Comment

March 7, 2024?

Good morning. We kick off today's session with risk sentiment holding steady ahead of the ECB’s Lagarde and round two of Powell's testimony. Stocks are a bit higher, there is little change in yields (US 10yr yield holding near the lows of the last month) and the US Dollar is broadly softer this morning.

China's trade balance saw a huge increase overnight on the back of much higher than expected exports (+7.1% YoY vs. 1.9% expected) with imports higher as well. Normally that would be seen as a positive? for economic growth but enthusiasm around the data has been tempered as the big jump has been attributed mainly to base effects. Indices in Hong Kong and mainland China both ended the session lower with the Nikkei also down over 1% as well as the Bank of Japan moves closer to the end of their negative rate era.

Equity markets in Europe are all higher although gains have been somewhat limited this morning. I think Lagarde will echo what we have heard from both Powell and Macklem already this week: "rate cuts are likely later this year but the ECB isn't in any hurry, the central bank wants to see more data that illustrates that inflation is on a path to return to target." In the end, I think the Fed, the BOC and the ECB will all end up cutting within a week of each other in June.

Futures point to gains on the open in North America and while Powell didn't offer too many surprises yesterday most of the post-testimony analysis says that he was just a little bit more dovish. Certainly, his line from yesterday about "not looking for better inflation readings than we've had, looking for more of what we have seen" doesn't read as hawkish as some of his Fed colleagues. Tomorrow's NFP and next week's CPI will be key for the Fed dots which will be updated later this month. Hotter data and there is a chance that the median will be shifted down from three rate cuts this year to two and that would definitely rattle the market. As expected data and it stays at three and we progress toward that first cut in June.

FX thoughts:

JPY - The Yen is the big mover once again overnight as there is more and more talk about a BOJ policy shift this month (BOJ meeting March 18/19). It has been clear for a while now that it is largely about wage growth for the BOJ on all the news overnight was quite positive on that front. Japan's cash earnings data was better than expected and the ongoing Shunto wage negotiations are producing some healthy wage gains. Japan's largest industrial union (UA Zensen) reported that full time worker have seen pay increases of 6.7%, while the Rengo union said wage increases look to be around 5.85% this year. That type of salary bump definitely gives the BOJ the greenlight for a policy shift, either this month or at the April 26th meeting. Reports say that a growing number of government officials in Japan are in favour of a BOJ interest rate increase in the near term as well. It all adds up to pressure on USDJPY with a lower 10 year US yield also weighing on the pair. The 100 and 200day MA's (147.66 and 146.15 respectively) are next support levels

AUD - The Oz is finally gaining a bit more traction managing to push through resistance at .6570 overnight. Even though it maybe be due to base effects, the better Chinese trade data has to help, also of note the Australian trade balance continued to increase overnight as well with exports higher month over month. Throw in a good run in equities YTD and really AUD should be trading higher. You know I also think the RBA doesn't cut this year, next topside levels .6620 and .6690.

GBP - Cable is trading just above resistance at 1.2740 this morning. You know how I feel here, core inflation is still on a 5 handle and wage growth is not consistent with a return to the BOE's inflation target. I'm not sure how/why the market is pricing in a summer rate cut. If the UK economic data manages to hold up, Sterling could be an outperformer. Next topside level is 1.2820.

EUR - The ECB remained unchanged on all rates this morning, no surprise there. On the dovish side, staff projections for inflation have been lowered to 2.3% this year with growth projections also revised lower (.6% in 2024). Again, I don't think a huge surprise and I don't think it really changes the timing for the ECB, the central bank notes domestic price pressures remain high and I think April is too early for a cut. Expect Lagarde to say the ECB wants to see more data before a rate move. Still on track for June. Support 1.0830 and 1.0780, resistance 1.0930.

?CAD - Oil has had a healthy bounce over the last month as has the Western Select spread (Western Select crude up +16% since the start of February) and equities have had a terrific start to the year. Normally that would be a recipe for a stronger Canadian Dollar but Funds remains stuck near 1.3500 this morning despite healthy gains across other commodity currencies. I suppose we'll have to wait and see what tomorrow's employment report brings. The 1.3520-50 area is now back to resistance, and we know offers are very good at 1.3600, support, 1.3477 (200day MA) and 1.3415.

Good luck.