Today's FX Comment

December 19, 2024

 Good morning. How can Fed Chair Powell cut rates yet still come off as the Grinch who stole Christmas?

The Fed's "hawkish" rate cut continued to be felt across all markets overnight. Asian indices were all lower with not even the Nikkei being spared despite a less hawkish/more dovish sounding BOJ. Even worse in China, the still struggling property market faces another hurdle as Chinese banks raised mortgage rates for the first time since 2021 due to narrowing interest margins. Hard to see real estate having a sustained rally with rates heading higher.

No surprise European markets are all down 1-1.25% playing catch up to yesterday's late day selloff in North America. Following on the heels of the BOJ, we had another more dovish leaning central bank this morning with the BOE holding rates steady but in a more accommodative twist three central bank members dissented and favoured a rate cut.

North American equity markets are showing signs of life this morning and look set to open higher. I suppose a small bounce may be in order after a 2.5-3.5% drop yesterday and ten straight down days for the Dow. What can we say? The Fed dots matched market expectations for only two cuts next year and Fed chair Powell sounded a lot less accommodative than we have heard in a long time. Call it the Trump effect, the Fed may say they will not react to "potential" Trump policy but it sure feels like they are already. Get ready for 2025, tariff threats have already been made with more to come and already we're starting to see some chaos. Elon Musk says he doesn't like the like the deal the US government had in place to avoid a shut down and now President-elect Trump says he doesn't like it either and is reportedly threatening to oust Republicans who support the agreement. I wonder what happens to the US economy next year if/when US yields head higher, the Fed holds off on rate cuts and soon to be President again Trump piles on the debt...

FX thoughts:

JPY - I am not sure what the BOJ and Japanese authorities are thinking. They express concern over a weak Yen and have had to step in and intervene to support the currency, yet we have the central bank sabotaging things last night by sounding more patient/dovish with respect to another rate hike. Talk about a mixed message. There was one dissenter among BOJ members who wanted to hike last but Governor Ueda ruled the day and leaned dovish when he spoke and expressed caution on future rate increases saying he needed to wait for more wage and price data. Resistance 157.10 and 158.25, back to intervention watch now.

AUD - The Oz has been absolutely trashed lately mainly on concerns around the Chinese economy. Here is the thing though: iron ore prices have been very steady, Australian employment remains healthy and last night Australian consumer inflation expectations ratcheted higher to 4.2% from 3.8% prior. Still tough for the RBA to cut rates. Next support is .6170.

EUR - Well, the Euro finally moved away from 1.0500, it just took a less accommodative sounding Powell to do it. Support is decent around 1.0335-40 and we will likely now find offers lowered to 1.0500 from 1.0550.

GBP - The BOE kept rates steady as expected but the vote was more dovish with three members wanting a rate cut. Interesting, the UK unemployment rate remains fairly low at 4.3%, wage growth is hot at 5.2% YoY and core CPI remains well above target but some at the central bank are itching to cut rates. We are right on support at 1.2610 this morning, more at 1.2570.

CAD - I think the running total is now up to 50 Liberal MPs who want PM Trudeau to step down. With parliament adjourned until almost the end of January the Prime Minister has bought himself some time but this holiday period will be one of deep reflection, don't be surprised if the PM announces he is stepping down before parliament reconvenes. Not getting overly political here, but I think the Canadian Dollar gets a boost when an election is called. All about year end flow now that the shock and awe of the Fed is out of the way. Support 1.4325.

Good luck.