Today's FX Comment
Patric Booth, CFA
Managing Director, Fixed Income and Currencies at National Bank of Canada
June 18, 2024?
Good morning, and congratulations to the Boston Celtics for winning a record setting 18th NBA Championship. You could almost call them the Montreal Canadiens of the NBA....
Today we get US Retail Sales data which I think is more important than usual. Given that the consumer has been a big driver of America's economic engine, given the talk we have heard about the consumer being stretched and given last month's flat print the market might pay more attention than normal to today's release. An obvious gauge of the health of the consumer and of the overall economy.
Ahead of today's US data is it a sea of green for equities as risk sentiment improved overnight. Given a very strong handoff from North America yesterday shares in Asia rebounded last night with indices in Australia and Japan leading the way higher (both up about 1%). The Hang Seng was the lone underperformer ending the session marginally lower.
China's state planner reiterated last night that the domestic economic recovery faces challenges but at the same time the PBOC is expected to keep its 1 and 5 year Loan Prime Rates unchanged tomorrow. Seems if the domestic economy is challenged and inflation is as low as it is in China, there is room for some helpful rate cuts. On another note, Donald Trump’s last national security adviser, Robert O’Brien (who may have another significant role if Trump wins in November) has suggested that Trump should sever all ties with China if he becomes President again. Sounds like a difficult task given how intertwined the two economies are, but maybe a glimpse into potential future foreign policy. US-China relations may be in for a turbulent run.
European equity markets are all trading higher this morning as fears around the upcoming French election recede a bit and pressure on French bonds has eased. French far-right leader Le Pen's more conciliatory sounding remarks yesterday have clearly calmed the markets nerves, at least for now. I am far from an expert on French politics and I am not sure if Le Pen's RN party will get a majority but it is likely they will have a much greater say in government regardless of the final vote. Will it mean a Liz Truss UK style moment for the French bond market? I'm not so sure, politicians learn from each other's mistakes and I don't think Le Pen will go down the Truss path. We'll see. At the end of the day, I do not think it will be the end of the EU or the Euro.
Futures point to a flattish open ahead of today's data and no less than six Fed speakers. The Fed’s Barkin, Collins, Logan, Kugler, Musalem and Goolsbee are all on tap and how many times can we hear "progress is being made on inflation but we have more work to do". The Fed needs to clamp down on all these appearances.
FX thoughts:
JPY - USDJPY keeps grinding higher with BOJ Governor Ueda not helping by saying overnight that the Japanese economy is only recovering moderately (not a screaming endorsement for a rate hike). At the same time the Governor made the usual comments about watching FX and import prices carefully. US yields post-retail sales will be a driver today. Nearby resistance at 158.45 but then there isn't much ahead of 160. Are we near the intervention zone?
AUD - The RBA played out pretty much as expected last night, no change in rates and the central bank will “not rule anything in or out” when it comes to rates. We can debate whether it was more hawkish or not but I personally think it was with the CB noting a rate hike was considered at the meeting but not a cut (makes sense and really when a cut is not considered it kind of rules it out...). The market is still? thinking there might be a rate cut here this year, I don't think so. The RBA will easily outlast the Fed when it comes to finally breaking down and lowering rates. .6580 is initial support followed by .6530, resistance between .6700-20.
GBP - Cable remains in a 1.2600-1.2800 range, that may change with UK CPI data tomorrow morning followed by the BOE on Thursday. Admittedly, given the upcoming election the BOE may try to fly under the radar and be more muted than usual so the focus will be on the inflation data. Keep trading the range for now.
EUR - German sentiment data was softer than expected this morning, maybe no surprise given the recent EU election results and the upcoming vote in France. No change here, it is still tough to see a sustained rally in the Euro ahead of the upcoming election. Call it a buyer's strike. Support 1.0680 and 1.0610.
CAD - Interesting article in the Globe and Mail this morning if you haven't seen it:
"Past rate hikes will cast long shadow on consumption, even as monetary policy eases: BoC researchers"
The article notes that the report is a staff analytical note, which does not necessarily represent the view of the Bank of Canada’s governing council but the gist of the piece is that the Bank of Canada’s "rapid succession of rate hikes over the past two years will continue to reduce the overall disposable income of homeowners with mortgages and weigh on consumer spending even as interest rates start to come down." “A key insight from our analysis is that the downward pressure on consumption from rate hikes could last longer than the rate hike cycle itself,” the researchers write. The report goes on to note: "only around half of homeowners with mortgages have hit reset since the start of the rate-hike cycle. The remainder will renew over the next few years, and many face a steep jump in mortgage costs, especially those who stretched to get into the housing market when interest rates were at record lows during the pandemic."
I don’t think it comes as a huge surprise. Canadians are way more sensitive than homeowners south of the border to the increase in mortgage rates and there is no doubt the BOC needs to bring rates down sooner and faster than the Fed. That's why they have started already and that is why I suppose IMM data shows record Canadian Dollar shorts. The market has the trade on already. Same levels: 1.3785 on top, 1.3665 on the downside although USDCAD is having trouble even getting to 1.3700 right now.
Good luck.