FX Weekly

FX Weekly Update – August 23rd, 2021

Posted Under: Weekly updates

Commodity prices have fallen across the board and that has pushed the dollar higher, specifically against the commodity currencies. Aussie dollar, Canadian dollar, South African rand, Brazilian real and the Mexican peso fell dramatically, while the euro and pound sterling weakened to a lesser degree. Oil fell to $62.25/bbl., iron ore is off 26% since early July and corn and other agricultural commodities are well off their highs of just a few months ago. The U.S. 10-year yield ended the week at 1.23% while the 2-year yield remained steady at 0.22%.

Markets are concerned about two things: the Afghanistan situation and, an economic slowdown in China. The fall-out from Afghanistan will take months if not longer to play-out. Immediate concerns are evacuating both U.S. citizens and Afghanis that want to leave. U.S. allies are scrambling to get their citizens out as well, but they seem to be doing a better job than the U.S. Secondly, the Taliban’s ability to govern as they have indicated they will i.e no violence or revenge against Afghanis that helped the U.S. and her allies; Girls continuing their education; no harboring of Isis or Al Qaeda. This would be a major change if it happens.

China is experiencing a slow-down and that is directly impacting the demand for iron ore and oil. Although the lower oil prices are welcome at the gas pump, the risk of prices falling too far may lead to risk of the health of the oil industry. We can’t ignore the impact of the Delta covid spread due to the rising infections. Hospitalizations are increasing but the number of deaths is not what they were a year ago. Of course, the media coverage makes the outbreak seem much more severe, so it’s a good time to tune them out!

The U.S. dollar rallied all last week and may continue early in this week as more weakness in commodities is expected. Last week we talked about the weaker levels of foreign currencies offering an opportunity to purchase these for immediate or future payments – of consider hedging with forward contracts. We suggest the same this week. This move in the dollar will hurt companies that have not hedged their “foreign revenues” but is helpful for those with expenses.

EUR (1.1700): The euro slid all week, falling to 1.1662 before recovering. The lack of energy at the end of the week does tell us that the concern for being too short EUR into the weekend was apparent. This week we will focus on the last week’s low, and then the 1.1600 major support area. A failure to move through these levels should again see short covering toward 1.1800. Identify levels you would like to purchase the single currency and remain steadfast when the market gets there.

Resistance: 1.1750, 1.1800; Support: 1.1662, 1.1600

GBP (1.3600): Similar to the euro, the pound fell last week and nearly matching its low of 1.3571 from July 19th. However, unlike the euro the bounce was limited. GBP remains below the long-term trend line. This is a bearish sign, and the currency should move through that low print, with the next level to watch at 1.3412 (50% retracement). Opportunities to buy a cheaper currency ahead.

Resistance: 1.3750, 1.3900; Support: 1.3571, 1.3530

JPY (109.70): Unlike either of the above currencies the yen was relatively stable last week. Two reasons: first, the yield on the U.S. 10-year fell, and as we have discussed previously the correlation between a falling yield and falling USD/JPY is strong, secondly, the desire for the markets to purchase a safe-haven currency is strong. We believe that the yen remains relatively stable early in the week but will strengthen into the weekend. Until the Afghanistan situation becomes clearer (evacuations pick-up and the Taliban does what they say), the path of least resistance for USD/JPY is lower.

Resistance: 110.20, 110.80; Support: 109.50, 109.00

CAD (1.2820): Oil prices impacted the Canadian in a meaningful way. The high for USD/CAD last week was 1.2949, just below the 1.3016 (38.2% retracement) level. The combination of oil falling and stop-losses powered the U.S. dollar higher. We are expecting more weakness in oil early this week, therefore the 1.3016 area is at risk. Many clients we work with need to sell the Canadian dollar and buy U.S. dollars. This is a week that will test the mettle of those positions. More stop-losses above 1.3000 can easily push those U.S dollar to 1.3100 or higher!

Resistance: 1.2880, 1.3016; Support: 1.2785, 1.2600

MXN (20.3500): We believe this was a major move for USD/MXN and not one we were expecting! Then again, who was expecting the quick move out of Afghanistan? Most U.S. and Canadian based companies have some manufacturing or other expenses in Mexico. This move in the dollar is a great opportunity to purchase pesos. Hedging those expenses with the combination of this weaker peso and forward points is a great way to cheapen those expenses and provide a better view of your dollar costs.

Resistance: 20.4500, 20.6000; Support: 20.2000, 19.9500

CNY/CNH: (6.4900): Same scenario as the last several weeks. The PBOC is struggling to keep their economy moving forward. They would most likely want their currency to weaken but not quickly.

Resistance: 6.5500, 6.5800; Support: 6.4500, 6.4000