Today's FX Comment

May 6, 2024?

Good morning and happy Monday. We won't even talk about the disappointment many people in the city of Toronto are feeling after a tough OT loss to the Bruins Saturday night...

As we start the week, the general theme is higher equities and a slightly softer US Dollar as the market continues to digest Friday's softer than expected (but not stagflationary) non-farm payrolls data. Japan and parts of Asia were closed for holiday today but the equity markets that were active all traded higher including mainland China which re-opened after an extended break last week. Chinese services PMI matched expectations (16th month of expansion) helping to lift the composite PMI number to a 10 month high (maybe the worst is in the rear view mirror for the Chinese economy?). The PBOC fixed the Yuan stronger once again (below 7.1000) and vowed financial support for equipment renewal while President Xi embarked upon his first trip to Europe in five years.

The UK is out for holiday today but the rest of Europe is open and indices there are all in the green managing to shrug off geopolitics and concerns around Israel/Gaza with the IDF reportedly preparing for an attack on Rafah. Eurozone services PMI data were all in expansionary territory this morning and EU investor confidence data continues to improve as well.

Futures point to gains on the open in North America with yields a little bit lower this morning and the market pricing in closer to two Fed rate cuts this year. Friday's NFP data was just right, wage growth cooled, the unemployment rate ticked a tiny bit higher and 175,000 jobs while being far from stagflationary is notably lower than the blistering pace of gains we have seen over the last several months. It was a Goldilocks report and that combined with a pretty solid earnings season continues to support equities/risk sentiment as we start the week.

FX thoughts:

JPY - USDJPY is climbing a bit higher this morning probably not thrilling Japanese officials given the softer US data last week. I still feel that short Yen trades are becoming more difficult to hold on to. I know the market may want to challenge the BOJ but I think the BOJ will be up to the challenge and will be ready to intervene again. Another BOJ rate hike would help the currency as would those reported tax breaks for companies that repatriate foreign profits. Support 152 and 150.20.

AUD - The Oz is pushing higher again this morning and why not, equities have been performing well, it looks like the Chinese economy might have turned the corner, metals prices are bouncing again and we have the RBA later this evening and while they won't hike rates, it is hard to see them being anything but hawkish sounding given rising house prices, healthy wage and employment data and a re-acceleration in inflation. We are right on resistance at .6635 this morning, next topside level is .6675.

GBP - UK PM Sunak has pushed out a general election to the Fall, I guess no surprise given the recent local election results. We have the BOE later this week, I think given strong wage growth and very sticky services inflation data it will be a challenge for them to sound dovish. The market is leaning toward an August rate cut and this week's meeting could go a long way to shifting those expectations (one way or another to be fair). Support 1.2470, resistance 1.2580 and 1.2644 (100 day MA).

EUR - GDP has been better than expected, inflation has fallen more rapidly than expected, confidence data has been improving and today's services PMI data shows the EU economy expanding at a healthy clip. It feels like the Eurozone economy is improving just when the US economy is showing signs of slowing down. I think the Euro will be supported on dips. We are right on resistance at 1.0785 this morning, next topside levels: 1.0840 and 1.0885.

CAD - The Canadian Dollar is becoming the Rodney Dangerfield of the FX world, it just can't get no respect and continues to underperform this morning. The US Dollar is broadly lower, equities are set to open higher and oil has bounced to start the week, it sort of feels that against that backdrop USDCAD should be trading lower. Leveraged names increased their CAD short positions according to the latest IMM data and positioning looks stretched, if we continue to see broader weakness in the US Dollar you have to think those positions will get pared back. CAD employment data this week will have a real spotlight in the absence of NFP, long gamma over the release might make sense. Support between 1.3600-20, resistance ahead of 1.3700 with more offers likely around 1.3730.

Good luck.

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