Today's FX Comment

March 4, 2024?

Good morning, I hope you had a great weekend. I did something on the weekend I have been thinking about since 1981 but have never been brave enough to do, I had my first McRib at McDonald's. The verdict: not so great, I should have stuck with the Big Mac. The shamrock shake however was excellent as always....

What a (potentially) pivotal week we have ahead of us. Double employment day Friday, the BOC and ECB rate announcements, President Biden's state of the union address, Fed Chair Powell's testimony, the UK budget, China's annual National People’s Congress and if you stretch it out a bit, US CPI on the 12th. Maybe a bit of a make or break eight day period for risk sentiment, yields, equities and the US Dollar. Ahead of all that, not much is going on the morning, yields are pretty flay, stocks are pretty flat and FX is pretty flat. Call it the calm before the storm.

Things started out on a fairly positive note overnight in Asia with the Nikkei closing above 40,000 for the first time and stocks in mainland China higher as the NPC kicks off. It was noted that NPC got off to an unusual start with a spokesperson saying that Premier Li will not hold the usual Premier's press conference at the event this year. The FT also reports that President Xi is resisting growing market pressure for stronger stimulus to spur China’s economic recovery. Interesting to see what comes out of this week's National People's Congress with China still facing a sagging property sector, deflation and declining foreign investment. Perhaps the market best be prepared for a lack of further stimulus?

European indices are mixed this morning but overall are little changed to start the week. EU Investor confidence data released today was a bit better than expected. More importantly, the trend is heading in the right direction with the data improving for the fifth straight month. Futures point to a flattish open in North America ahead of an event/data heavy week. At the end of the day, I would expect Fed Chair Powell’s semi-annual testimony to be more of a non-event. By now we have heard endless Fed members tell us over and over that rate cuts will likely be appropriate "later this year" but that we're not there yet. Hard to see Powell deviating much from that script. What will matter- Friday's NFP and next week's CPI data. It was last month's 1-2 punch of NFP and CPI that led to a huge re-pricing of Fed rate cuts this year (prior to last month's NFP the market still had about 150bps of rate cuts priced in this year) and you have to wonder if there was some seasonality in last month's data. Will we see yet another series of hot prints or will this month's data see some "give back". The Fed's Goolsbee did note that he wouldn't be surprised if the January inflation print was noise. Either way it seems to set the stage for some significant volatility over the next week or so. Long gamma anyone?

FX thoughts:

JPY - Japan saw some huge Q4 capex data overnight (+16.4% YoY vs. 2.8% expected) with some analysts now expecting Japan's Q4 GDP to be revised upwards on the back of the print. There are also reports that the Japanese government is pushing the BOJ to normalize rates and apparently considering announcing an official end to deflation (reports later denied). Regardless, we know a policy shift from the BOJ is coming, when it gets combined with Fed rate cuts I think we will see USDJPY accelerate lower. Support 149.70 followed by 148.60.

AUD - Little change this morning in the Oz. We have been warned by the Australian Treasurer that tomorrow's GDP print could be negative, maybe sell the rumour/buy the fact tomorrow night? Support .6455-60, resistance .6570.

EUR - The ECB won't do anything on rates this week, we all know that, but we also know we are getting closer to a cut with core inflation hitting a two year low in the Euro zone. We should continue to see some bids ahead of 1.0800 with more support at 1.0780, resistance 1.0870 and 1.0900.

GBP - One way or the other we're going to get some type of tax cut out of the UK this week. In the end, that will simply make the BOE's job even harder. Core inflation is still on a 5 handle, I'm not sure how/why the market is pricing in a summer rate cut. We're back in the 1.2650-1.2740 range for now.

?CAD - It is a pretty big week for the Canadian Dollar with the BOC followed by the employment report. We know the Bank won't be doing anything with rates this week, but with the output gap widening, GDP flatlining and softer than expected core inflation we are drawing nearer to rate cuts. Maybe too early for the Bank to signal a cut this week, the April meeting + MPR seems to be a more likely time to send that signal followed by a June cut but you never know. In the meantime, resistance at 1.3620 with support between 1.3520-50.

Good luck.

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