FX Weekly Update – August 1st, 2022
Posted Under: Weekly updates
The Federal Reserve increased rates by 75 bps, which was expected. The issue, though, was the Fed’s denial of the U.S. economy being in a recession. The following day (Thursday) the 2nd quarter GDP was reported, -0.9%. The historical definition of a recession is two consecutive quarters of negative growth. The first quarter GDP registered a –2.6%, therefore, by definition, the U.S. economy is in recession. One of the points that Jerome Powell pointed out, in terms of inflation, is that the Fed does not look at CPI as the only gauge of inflation. They focus more on PCE. Friday morning, PCE was released, and it was 4.8% (YOY) higher than forecast. Now we have a Fed that does not believe the economy is in recession and that their key inflation number, is higher than expected. Equities rallied and ended the month positive; interest rates fell, and the dollar gave back some of the previous week’s gains.
We have another big week ahead. The Bank of England is expected to raise interest rates on Thursday by 50 bps. Friday morning is U.S. non-farm payrolls with the forecast being an increase of 255,000 jobs and the dollar will be sold off into Friday’s number. We do not believe that this sell-off will be anything more than position squaring and profit taking.
Last comment on the dollar: 79 year old President Biden has again been diagnosed with covid-19. He had been covid free for two days.
EUR (1.0240): Last week the single-currency moved between a low of 1.0105 (post Fed) and 1.0252. The hourly chart has been building a falling trend and that would point to a breakout of the euro to the upside. The measuring objective is 1.0370. Resistance is 1.0275. Failure to rally through there would push the currency to 1.0150 and then 1.0070. Most G7 economies will have manufacturing numbers throughout the week. Though most point to slowing economies, they are relative to the other economies. This can be a volatile week for the currency.
GBP (1.2190): The sterling has dealt in a very narrow range compared to most other currencies. This week, as mentioned above, is the BoE’s turn to raise rates. They are expected to increase by 50 bps. The technical set-up for the GBP points to a move toward 1.2500. This would be not only driven by sterling strength against the dollar but also the euro. Keep in mind that the ECB is in a tricky situation. They are stuck between several countries with weak economies and those that are not as weak. This means that the BoE is more likely to adjust their rates higher, quicker. Favoring the pound against the Euro.
JPY (132.70): The yen is moving higher against the dollar without much of a slow-down. We discussed for several weeks the historical importance of the 138-140 area. This level has again held the USD/JPY rally. We discussed buying yen for future expenses was a particularly good risk management tool. Support for the dollar is at 130.50 and then again at 127.00. GreenShootsFX still believes that buying yen even at the current levels is a great idea.
CAD (1.2800): There is no question that we have been bearish USD/CAD. No question, that this view has not been correct over the last several months. But we remain bearish the U.S. dollar against Canada. The usual suspects drive this view. Higher oil prices and a BoC that will match the Fed with its rate hikes. Now that the Fed has said there is no recession in the U.S., and that inflation may be peaking, the BoC may actually be more hawkish on their rates. The main support level is 1.2575. Below that, it is back to 1.2350. If we are wrong then the July 13th high of 1.3225 would be the target.
MXN (20.3800): The overall US dollar rally over the last quarter pushed USD/MXN to 21.05. Now, the peso buyers have pushed the peso higher to 20.3800. Businesses with local peso expenses should always be laddering in peso forward contracts to cover these expenses. Taking advantage of the weak peso and the favorable interest rate differential is the best way to hedge those costs and provide a known U.S. dollar cost. We do not speak much about the direction of the peso but more about when hedgers should be stripping on forwards! This remains one of those levels.
CNY (6.7625): CNY has fallen over the last several weeks against the dollar. We believe that the most realistic view is that it will move weaker toward the May 8th level of 6.8400. The sword rattling between the Chinese communist government and the U.S. is not good for the Chinese currency. Of course, we have always said that the communist government has the last say when it comes to their currency. While their economy is getting back on track after their covid close downs, product is beginning to move out if their ports, but it is slow. The global recession, sans the U.S., will continue to cause the Chinese factories shelves to remain full. The best thing that the Chinese can have happen to their economy, is a weak currency which will make their product cheaper, moving those stockpiles.