FX Weekly Update – August 16th, 2021
Posted Under: Weekly updates
Inflation and consumer confidence were top of mind last week. CPI was in line with expectations (5.4%) but PPI, or wholesale inflation printed a historical high (7.8%). Friday mornings’ release of the University of Michigan’s consumer confidence was very disappointing, falling 11 points to 70.2 -the lowest level since December of 2011. Equities in the U.S. shrugged off these reports and ended the week in record territory. The yield on the 10-year fell back to 1.28% after trading near 1.39% after the release of the PPI. Oil prices, which have fallen from the recent headlines, have dipped below $70.bbl, now trading at $68/bbl. Commodity prices in general have fallen – iron ore, copper, silver, corn, natural gas, all lower.
The dollar had a very quiet week, albeit slowly strengthening throughout, pushing currencies lower, only to completely reverse on Friday, ending very near where it began on Monday. The most likely reason for the reversal is trading desks spent the week getting long (buying dollars) and after the disappointing Michigan confidence number, traders took back those longs and left the greenback without gaining new ground. Retail sales and building permits are the focus this week. There may be some negative impact from the U.S. now sending 3,000 U.S. Marines back into Afghanistan to assist in the removal of American citizens.
EUR (1.1780): We discussed the reversal in the dollar but no currency was more impacted than the euro. The low print for the week was 1.1704 although Friday saw the currency rally back to 1.1800 (high:1.1804) and this week is setting up for another push higher. Through all the recovery excitement, and outsized economic numbers, the single currency is not gaining or losing ground. Our suggestion is to have a level in mind, to purchase or sell euro and execute when those levels are reached. Numbers from the EMU include CPI, Employment and
Levels to watch: 1.1704, 1.1750, 1.1835, 1.1875
GBP (1.3810): The low last week was 1.3790, before ending at 1.3890. This week’s opening is 1.3810, which is strange. No news out of the U.K. that we have seen. Most likely a print resulting from an early trade pushed through an electronic platform, catching Australian trading desks who were not prepared for it! Welcome to 24-hour trading in an unregulated market. Last week was an adjustment in the EUR/GBP cross, felt more in the pound than in the euro. The GBP weakened against the EUR and the lack of movement in the pound was one clue that the cross was actively moving. Like the euro, look for levels to buy/sell and do not wait for another “few pips”. Stick to the plan. The week ahead includes Rightmove house price index, unemployment rate, average hourly earnings, CPI, PPI, retail price index consumer and producer price index as well as GFK consumer confidence. That is a lot of data, and we should follow these for clues of further economic recovery.
Levels to watch: 1.3790, 1.3850, 1.3890
JPY (109.50): Two weeks ago, we expressed our concern with the dollar against the yen. The dollar promptly rallied but reversed all that gain last Friday. We have included a daily chart below. To us, it does look like the dollar will continue to weaken, especially if U.S. yields continue to remain weaker than had been expected earlier in the year. Keep in mind that the yen is considered a “safe haven” currency. With the Delta covid, Afghanistan issue and of course transitory inflation, it does make sense that the yen buyers are looking to purchase the currency. GDP, merchandise trade balance and machinery orders lead Japan calendar.
Levels to watch: 108.72, 109.00, 110.00, 110.50
CAD (1.2520): USD/CAD has been caught between a couple changing dynamics. The obvious is the fall in oil prices. This is keeping the Canadian dollar defensive (weaker) against the U.S. dollar. Over-all U.S. dollar reversed its early strength against most currencies and likely capped any oil price weakness for the Canadian. Without falling oil prices, we would expect that the CAD would be dealing in the mid to low 1.24’s. The million-dollar question is how quickly the global economy can deal with and recover from the Delta covid variant. A quick recovery should push prices back toward $75/bbl. and the Canadian will gain strength and retest 1.19/1.20. If the economy cannot recover quickly (our thought), then USD/CAD will remain in a range of 1.2450-1.2650! Manufacturing and wholesale sales (yes that is correct) begin the week, followed by housing starts, CPI and ADP employment change.
Levels to watch: 1.2450, 1.2500, 1.2580, 1.2610
MXN (19.85): No movement in the peso! The big news this past week was Banxico leaving their interest rate unchanged at 4.5%. What did the peso do? Moved from 19.89 to 19.94 and then back again! Look at the below, it is a daily snapshot of the last couple months. Support for USD/MXN is 19.80 and 19.60, resistance at 20.25.
CNY (6.4765): No change from the last several weeks. The PBOC is focused on trade, Afghanistan and pressuring Chinese companies that have listed on U.S. exchanges. We would expect that the central bank will eventually allow their currency to move again. It will be quick and dramatic, it will most likely a stronger currency and weaker U.S. dollar.