Today's FX Comment

October 31, 2023

Good morning, it is good to be back after spending time in the Steel City over the weekend (Pittsburgh not Hamilton to be clear). Penguins game Saturday, Steelers game Sunday (tough loss) with the Andy Warhol museum thrown in for some culture. Great people and great sports town.

Overnight, Asian indices were mixed. The big news was of course the BOJ with the central bank further loosening YCC saying that the 1% level on 10yr JGB was a reference point rather than a strict ceiling (really YCC is gone, the BOJ just hasn't formally admitted it yet), the bank left its negative interest rate and its forward guidance unchanged. Elsewhere PMI data out of China slipped back into contractionary territory as China's hoped for economic recovery remains in very low gear. President Xi is hosting the twice-a-decade Financial Work Conference in Beijing this week. The gathering’s main goal is to push for financial reforms that aid economic growth and safeguard stability. Let's see what comes out of that. I am sure the market is betting on more promises with little action at this point.

European equity markets are all higher this morning. Good and not so good economic news today for the EU, the not so good GDP growth remains tepid, the good news YoY headline inflation is back on a 2 handle with core inflation falling to 4.2%, the lowest level in 15 months. I think the market is already expecting very little in terms of European economic growth so the not so good GDP news is already discounted, the market focus is likely on the better inflation numbers. Less fears of stagflation and less work for the ECB to do.

Futures point to gains on the open in North America but let's face it, it has not been a pretty month of October and it has been a very poor three month stretch for equities. On the bright side: things can only get better? Fed on hold again tomorrow? Peak central bank rates have been achieved? Earnings have been decent. US economy is holding up increasing the chances for a soft landing. US Treasury department borrowing less than it had previously estimated, maybe we have seen a peak in bond yields? Perhaps a de-escalation in the Middle East? November the second best month of the year for stocks over the last 5 and 10 year periods? Maybe I am just being overly optimistic......

FX thoughts:

JPY - YCC is done, the announcement is a mere formality. It is not helping the Yen this morning though with USDJPY probing higher looking for that BOJ intervention level. It is a very slow process but the stage is being set for an end to negative rates with the BOJ also upgrading their inflation forecasts (2.8% for 2024 up from 1.9%). USDJPY pushing toward the highs from October 2022, EURJPY hitting 160 for the first time since 2008, sure feels like intervention is coming. Be prepared.

AUD - Resistance at .6360 continues to cap the Oz for now. Next topside level is .6420. I think the RBA will be hiking again, the market is 50-50 for next week, better for the central bank to act earlier and get it over with.

EUR - Headline EU inflation printed on a 2 handle for the first time since July 2021. That is a good thing. It means less needs to be done by the ECB and it means the Eurozone economy has a slightly better fighting chance. 1.0590-1.0610 is the support zone now. Resistance 1.0675-1.0695.

GBP - Cable is still stuck between nearby support at 1.2110 and resistance at 1.2270. Core inflation in the UK remains about 2% higher than in the EU and for the BOE that means either more rate hikes or higher rates for an awful lot longer. Either way it will be hard on the UK economy. Stagflation remains a real threat here.

CAD - I have been saying the BOC is done with hikes for a long time and I think the entire market has come around to that belief now. Our economics team has been calling for 100bps of rate cuts next year from the Bank as well, that seemed aggressive at the start of the month (market was still pricing in BOC rate hikes) but not so much now (market pricing in 60bps of cuts by next October). Canada's GDP is tracking for back to back contractions in Q2 and Q3, that sounds like a technical recession to me and it is far below BOC estimates. Governor Macklem can talk tough and keep threatening hikes but we have not even felt the full impact of the rate hikes the Bank has done to date. The average mortgage payment in Ontario has increased by over $1000 per month, it might not hurt much the first month or two but the impact sure does add up when you burn through savings. Spending may hold up in between now and Christmas but expect the consumer to really slow down in the new year. All that being said, it will be broader moves in the US Dollar that will dominate going forward. Will Powell sound more accommodative tomorrow and kickstart broader US Dollar weakness? Watch for CAD to underperform on the crosses.

Good luck.