FX Weekly

FX Weekly Update – August 2nd, 2021

Posted Under: Weekly updates

Last week was another where inflation was the main concern of the rate and currency markets. The Fed did not make changes to the current Fed funds rate and left the current bond purchases at the same level of $120B. GDP came in at 6.1%, better than expected. New home sales disappointed as did retail sales. Together, this pushed 10-year yields to 1.22% and the dollar slipped at week’s end. The number of Delta related covid cases jumped dramatically in the U.S. and potential lockdowns are again a concern. Equity markets were a touch lower but remain near historical highs.

Friday this week will be focused on the U.S. employment situation, whereas manufacturing PMI, construction spending and factory orders will be released earlier in the week. All-important numbers as the economy continues to open but it is Friday’s number that will really keep the attention of the Fed, the Street and the investing community. Forecasts for non-farm jobs are as high as 900k.

EUR (1.1870): The euro struggled to move higher last week on the back of the weaker dollar, and although the rise was small it failed to maintain the 1.1900 level but the currency showed signs of life and we would expect this to continue in the week ahead. There is a full calendar ahead for the euro: German industrial production, retail sales, factory orders and industrial production. The Eurozone also has a long list on the calendar. PMI manufacturing, PPI, and retail sales.

EUR has been developing a triangle pattern since the last quarter of 2020. The current rally should be capped at 1.2200/1.2300. These patterns, when prices breakout, typically reach their target levels in half the time it takes to build it. There is a 70% chance that the price action is toward a higher euro!

GBP (1.3885): The pound rallied toward 1.4000 last week, printing highs of 1.3981 and 1.3963 on consecutive days before falling back below 1.3900. This week is going to be another interesting one for the U.K. where the BOE’s rate announcement on Wednesday will be the focus, but ,many economists do not expect any changes in rates or bond purchases. The U.K. had been the first country to deal with the Delta variant, and they are now experiencing a fall in cases, leading to their economy recovering. PMI services and construction will also be released but those will be minor players compared to the rate decision.

JPY (109.50): The yen rallied last week on the dollar weakness and the falling U.S. interest rates. The technical set-up is looking as if there will be another leg down in the dollar. The chart below shows the failure of the dollar rallies. Remaining below the short-term trend-line adds to the bearish sentiment. The more yen buying, the more likely the long carry trade positions will be squeezed, which has larger implications for the global asset markets.

CAD (1.2460): Last week’s story can simply be wrapped up as higher oil prices driving a stronger Canadian dollar. The Canadian found support at 1.2422 but this will most likely be a short term slow-down. Oil is set to rally again and that will add fuel to the move. The Canadian employment situation is released on Friday and is typically a mover of the currency. Although the U.S. number gets the media highlights, the Canadian release will create some movement in the Canadian dollar. We are expecting further Canadian strength, with support at the 1.2420 and 1.2350 level. Resistance is at 1.2520. This will be an interesting week for the loonie.

MXN (19.8500): There’s not much change in the currency nor are there any releases of economic data. What we will focus on is any discussion around the Bank of Mexico’s next rate move. Technically the peso is setting up for another rally as it remains below the short-term trendline, like that of the yen. We expect the dollar to fall at least to the first support area of 19.6000.

CNY (6.4575): There is not much to discuss when it comes to the Chinese currency. The larger, more important discussions are around trade, Chinese relationships with the U.S., Russia, Iran and Taiwan. These are topics that will need an entire book to sort out, as they are evolving. The PBOC is keeping a lid on the yuan’s strength at 6.4000 and the market is selling dollars at 6.5000.