FX Weekly Update – December 14th, 2020
Posted Under: Weekly updates
There is plenty to unpack this week even though the currency market has been relatively quiet. The USD has gained against most currencies as the central bank decisions around the globe to add liquidity to their respective economies has given pause to foreign currency buying. The most important and exciting development has been the UK, Canada and now the U.S. in approving the Covid vaccines. At the time of this writing (Sunday afternoon) trucks are leaving Michigan packed with the vaccines and heading across the country. This is a great achievement and GreenShootsFX cheers on the efforts to get these to front line personnel! What else has developed this weekend? The U.K. government has announced to their citizens that they should start stocking up their pantries, they are very nervous about any “go it alone” outcome from Brexit. The talk is that the U.K. and Brussels have gotten closer, but it is moving forward very slowly.
Why you need to know: This week is a time for the treasury departments to review their hedging strategies, hedging policies and FX relationships. When these currency markets take a pause or when new developments happen that may change the paradigm of the global economy, there needs to be a discussion! These can incorporate updated forecast, forward curves, cash needs etc. All the inputs that the C-suite will demand. Be prepared and reach out, we are here to help.
EUR (1.2100): Very quiet week as the single currency remains relatively unchanged against USD. It has made some gains against GBP and Yen for completely different reasons. The strength against the Sterling is not surprising. With so much uncertainty around Brexit, the euro is going to gain and may gain much more against GBP. Approximately 45% of UK output is currently flowing into the EU. Without the current trade agreements, that will change and benefit the EU. The rise compared to JPY reflects the global investors adding risk to their portfolios, the “carry trade”! Look for a much more volatile EUR this week and next. 1.2000 and 1.1800 is support and 1.2200 and then 1.2400 resistance.
GBP (1.3190): We can spend hours on the outcomes of a “do it alone” Brexit result. 1.2700 / 1.2500 is the first thought; GBP will fall! The U.K. GDP will contract, and longer-term predictions are for a fall of 5 ½% GDP. We would suggest that the most prudent thing for buyers GBP is to look for the 1.25-1.27 level and be prepared to purchase a chunk to either hold in a GreenShootsFX digital wallet or strip them into forward contracts. The alternative, if GBP rallies, is to keep an eye on that 1.3500 level. Positive outcome will see GBP rally and a close above that resistance area (we have traded it 3 times in 2020) opens up a move toward 1.4400.
CAD (1.2750): Oil remains well “bid” trading as high as $47.30. As expected, USD has fallen against CAD and opens the week at its lowest level. It is the one currency that continues to rise against USD and if oil continues its course toward $50/bbl and beyond, CAD will continue to rise. We expect a target of 1.2000 in the medium term. This will help the U.S. companies that are selling product into Canada, increasing their revenue in USD terms, as each Canadian dollar sold will result in more USD.
JPY (103.90): We discussed this briefly in the opening, the Yen continues to trade in a 104.50 / 103.50 range. Until there is a move outside that range there is not much to get excited about. Currency flows that are looking for yield are selling JPY, looking for better returns. Those that are concerned about Brexit, Covid and potential issues with U.S./China are buying yen to protect their portfolios. The tug of war does not seem to be concluding any time soon.
MXN (20.10): The peso has weakened after attempting to rally through 19.75 (peso higher / USD lower). MXN has been on a strong move higher for the last several months, so this type of action is not surprising. The peso does react differently to U.S. growth than most other currencies. Rather than weaken, the peso will strengthen because their economy will be positively affected. They are a manufacturing country, specifically near the border. We encourage companies that do manufacture in Mexico to take advantage of these current levels and hedge payroll and rent expenses, at least some percentage of which you can add further hedges to. Support for USD is 19.75 and resistance is 20.50!
CNY (6.54): USD fell again, making new lows. This does not seem to alarm the politicians on either side and that signals that the currency’s strength will not be held in check by the talking heads. USD support levels at 6.40 and 6.30. We believe the target for CNY is closer to 5.75 than 6.30 (most firms are looking at this as their forecast). For companies buying product from China, the rising currency means rising costs, in USD terms. How can they avoid this? Speak with your GreenShootsFX advisor. An actual person that has decades of experience, not a person that has 18 months of cold calling experience!