FX Weekly Update – August 22nd, 2022
Posted Under: Weekly updates
Yields on U.S. Treasuries rallied, supporting the dollar, and pushing it back near the highs from a month ago. Oil prices have stabilized near $90.00/bbl. Fed fund futures are priced at a 55% chance of a 0.5% rate hike by the Fed next month versus a 45% chance of a 0.75% hike. What can be the catalyst that the market is now focused on? There are two; Friday’s PCE (Personal Consumption Expenditures) and the start of the Jackson Hole Economic Policy weekend. The PCE is the Feds favorite inflation indicator. June printed 6.8%, a 40-year high. Fed’s Powell will be the focus of the entire event where the market is going to focus on his every word.
EUR (1.0040): The single-currency rallied twice last week toward 1.01350, and failed. Short-term long positions were liquidated, and now the week begins just above parity. The EU does have a slew of manufacturing and output data. In most cases they are forecast to be lower than in the previous months. The euro low of 0.9950, from July, is clearly a target for this week. Below that we would target 0.9750. Any euro rallies will most likely be sold ahead of 1.0125 and 1.0200 (if buyers push through 1.0125).
GBP (1.1825): Currency markets can be confusing, and the current sterling is the most difficult to understand. Last week, U.K. CPI printed 10.1%, a 40-year high. Money markets immediately priced in 2% worth of rate hikes which would bring the overnight rate to 3.75%. On this market movement, the GBP attempted to rally, but it was a weak effort. Sellers took over and the currency was sold hard to the low of 1.1792. The currency is oversold on a short-term basis but in the longer term the GBP does not look good. We look for the 1.1400 level to be a target for the next leg lower.
JPY (137.00): USD/JPY has reacted as expected. U.S. rates are moving higher (at least into next weekend) and the dollar rallied back to the key area of 138.00/140.00. A failure to rally through there will be met with yen buyers / USD sellers. First support is 135.50, and then 132.50. Yen expenses are cheaper this week than two weeks ago, just based on the currency weakness. Medium term expenses can be hedged at this current level. Forward points are costly, but as the spot market becomes more volatile the forward cost should not stand in the way of a disciplined hedge program.
CAD (1.3000): The economic data that will be released this week in Canada is extremely light. The new housing price index is released on Monday. Potentially a gauge of the current housing inflation. That is it for data and that leaves oil prices and any adjustment to current positions. The high level for 1.3223 was traded on July 14. We can call the last years’ worth of trading of large range that has a low of 1.2300 and the recent high of 1.3223. More specifically, the upward moving trend has support at 1.2750 and 1.2550. The resistance levels to keep in mind are 1.3075 and 1.3223.
MXN (20.2000): Along with all dollar pairs, USD/MXN rallied off its support area of 19.8000 and traded as high as 20.3300. There is nothing in the economic calendar that would be as meaningful to the peso as the upcoming U.S. PCE and Jackson Hole. An overall dollar rally may be building but USD/MXN will have resistance at 21.0000 and 21.5000. The range, 19.8000 to 21.0000, should contain the week and be traded accordingly.
CNY (6.8300): The 6.8400 level, which we have highlighted several times over the last few months, is now the first level achieved. The dollar strength against the CNY may occasionally become a political topic, this current rally is welcomed by the PBOC. Their management of the CNY along with the overall greenback strength is keeping the pair moving higher without a large move. Next resistance level of 6.9000, then 7.000! There’s potential to save on Chinese expenses because this weak CNY should become a topic of conversation in treasury departments. Utilizing the CNY market and using forward contracts to deliver CNY directly to the Chinese beneficiary, is a great way to remove some of the risk of purchasing / manufacturing product in China.