Today's FX Comment

January 29, 2024 

Good morning, I hope you had a great weekend. It was a tough weekend for Detroit Lions fans and tough for anyone (like me) who took the 49ers -6.5 with that last minute Lions touchdown....

The week kicks off with geopolitics once again front and center with news that three US troops were killed and several more injured in a drone attack in Jordan. This is the first time US troops have been killed since war broke out in Israel/Gaza and there are growing calls in the US to strike Iranian targets in retaliation. So far, cooler heads have prevailed but it is hard not to see tensions ratcheting up in the Middle East after yesterday's attack on American forces. On a more positive note, there are reports that that officials from the US, Israel, Egypt and Qatar are working towards a Gaza ceasefire. Market reaction to the latest news has been relatively muted with oil only a touch higher to start the session.

I wouldn't say the news out of Asia was all that good over the weekend but overall indices ex-mainland China managed to fair quite well. China's Evergrande Group received a liquidation order from Hong Kong's High court throwing into question about 1 million unfinished units from the property developer and weighing on Chinese equity markets more broadly. The verdict did not come as a huge surprise and there are doubts over whether or not the Hong Kong court ruling will be able to be enforced in mainland China so the damage to sentiment was not as bad as you might expect. What ultimately could be a lot more damaging to sentiment is the Trump Presidential campaign with the former President talking about 10-60% tariffs on all Chinese goods if elected. I wonder what that would do to inflation? Probably more rhetoric than anything but something to keep an eye on as the campaign heats up.

European indices are mixed this morning with some more dovish sounding ECB members (Villeroy saying ECB could cut interest rates at any moment this year) failing to give sentiment much of a lift. Futures point to a flattish/small higher open in North America with equities/risk managing to shrug off geopolitics for the most part.

We have a big week on tap with about a quarter of the S&P 500 reporting including Microsoft, Apple, Alphabet, Amazon and Meta to name a few. Throw in payrolls at the end of the week and the Fed in the middle and you have a pretty eventful calendar. The Wall Street Journal's Nick Timiraos wrote an article over the weekend noting Fed officials were likely to take a "symbolically important" step this week by no longer signaling in their policy statement that rates are more likely to rise than fall, effectively ending their tightening bias as the central bank progresses toward rate cuts later this year. I am not sure whether the first cut comes in March or May but I will say that I think that all that matters for the Fed right now is inflation. Even if this week's payrolls data is hotter than expected, as long as inflation continues to cool the Fed is fine with cutting rates. Core PCE came in a touch softer on Friday at 2.9% YoY, which is back in the Fed 's target range. What is more pronounced: 6 month annualized core PCE sits at 1.9% and 3 month annualized sits at 1.5%, both below target. A potential March rate cut is alive and well.

FX thoughts:

JPY - Japanese wage negotiations are underway but we won't have a clearer picture on their progress until March. In the meantime, it will be more about US yields with the 10 year yield US yield down by about 4bps this morning dragging USDJPY a bit lower alongside. I like to sell rallies here, the BOJ and the Fed are heading in different directions.  Resistance between 148.35-50.

AUD - The Oz hasn't been able to crack resistance at .6620 yet and maybe we tread water today with support at the 200 and 100 day MA's (.6577 and .6530 respectively). We see Australian retail sales data tonight and more importantly, inflation numbers tomorrow. Core CPI is expected to fall to 4.3% YoY, still some distance from the RBA's target. Rate cut pricing seems too aggressive here, I prefer buying dips.

EUR - Some dovish talk from various ECB members is weighing on the Euro this morning (ECB's Villeroy stated that Council could cut interest rates at any moment this year, Vujcic noted it was possible to cut with bigger increments than 25bps while Centeno said that Council should start cutting rates sooner rather than later). Support at 1.0840 has bent but hasn't quite broken yet and maybe best not to get caught short down here ahead of a Fed that will likely be dropping its tightening bias this week.

GBP - It feels like Cable just keeps testing either side of the range bounded by support at 1.2650 and resistance at 1.2740. The Fed and the BOE this week will maybe change that. It is still hard for me to see aggressive BOE rate cuts with core inflation on a 5 handle, the central bank has to stay hawkish sounding in my opinion.

CAD - We are trading just below initial support at 1.3440 this morning, next downside level is 1.3380. Oil has moved slowly but steadily higher over the last week or so, giving CAD a lift and the Western select discount is at its best level since last summer which helps as well. Really it will be all about the tone from the Fed this week and broader moves in the US Dollar post-announcement. If the Fed goes in March, the BOC will be right behind them in April. Resistance 1.3470 and 1.3520.

Good luck.