FX Weekly

FX Weekly Update – December 7th, 2020

Posted Under: Weekly updates

The decline of the USD accelerated throughout the past week. The UK’s adoption of the COVID vaccine and the expectation that the U.S. will do the same this week has supported the expectation of a global recovery. Commodity prices have also been rallying the last several months. We have been discussing oil prices moving higher on demand and the expectation of a recovery, but the metals have been the silent winners. Copper has risen to its highest level in 8 years! Aluminum and zinc have gained 15%. These three are used in so much of the production of autos and electronics that the market is expecting a recovery. Generally, when commodities rally, the USD falls. Lastly, the UK and EU have been negotiating all weekend and there is optimism that an agreement will happen sometime this week! The U.S. did release the jobless report on Friday and the economy added 245,000 jobs, lower than expected but the rate fell 0.2% to 6.7%.

Why you need to know?  With foreign currencies getting stronger against the USD, there is a real cost to buying those currencies to make payments to vendors, overseas factories or when purchasing equipment. These higher costs will impact margins and cost cash. Sending USD may seem to help the U.S. companies, but it only causes the risk to move from the U.S. company to the foreign company. Ultimately sending USD will become more expensive as these costs create a more expensive product and we’ll see increased padding (price inflation to cover FX risk) from the exporter. Managing the risk, utilizing GreenShootsFX‘s digital wallet, is one way to protect yourself but also entering into a forward contract or series of forward contracts is an alternative.

EUR (1.2120):  EUR shot higher last week moving to 1.2208 before falling back toward 1.2045 before settling the week at 1.2115. This increased volatility was welcomed by the markets and does provide a platform for a higher EUR in the weeks ahead. The target for this move higher is 1.2500, with the first line of resistance coming in at 1.2400. Support is at 1.2045 and 1.2000.

GBP (1.3400):  Volatility has been and will be the name of the game for GBP. The currency did briefly rally through 1.3500 last week (1.3518). We have been calling this level strong resistance for several weeks, if not months. The failure to hold above it should be a concern. GBP already has a 43 pip range and this is just the opening few hours for the week! News about Brexit negotiations becoming even more intense this weekend is the reason for the volatility. PM Johnson has lost some support in Parliament! Focus on the important levels: 1.3500 (a close above) and then 1.3800. Support is 1.3375 and 1.3300.

JPY (104.20):  Yen is dealing in its normal fashion. (1) Sideways, lethargic trade, (2) quick move, and (3) sideways, lethargic trade. This type of trade is typical of a currency that is used to create a global flow. When markets are nervous, it is used as a safe haven and when there is a “risk” on it is sold to provide cheap funding that looks for yield.  Resistance is at 104.75 and support at 103.60.

CAD (1.2785):  Oil and other commodities made large moves last week and that favored CAD. The levels of support that the currency traded through were important for further gains. We have been calling for USD/CAD to target the 1.20-1.25 level. With the current environment this area can be reached this week! Companies looking to pay in Canadian dollars should consider using forward contracts to hedge the first and second quarter of 2021. This move in CAD will not be impacted by Brexit and will only be further supported by the ban or hurdles on fracking by the new Harris / Biden team.

MXN (19.75):  The Peso has continued to strengthen against the USD and at this point does not seem to be slowing down. Last week we suggested there can be a period of retracting (USD higher) but that was early in the week and did not last. MXN was dealing at approximately 18.50 at the beginning of 2020, rallied to 25.75 but now looks to end the year back at 18.50! That is a very volatile currency and is a great example of why hedging is important. Most exposure that U.S. companies have in Mexico are payroll expenses and those are typically paid weekly. A simple hedge to consider is a large percent of those expenses, with each forward contract settling the day before that payroll is paid. Hedging a full quarters worth is a start and depending on the predictability, hedging 50-75% for a full year is common (52 contracts).

CNH (6.53):  President elect Biden is not expected to reverse course on China on day 1 of the Harris / Biden administration. Now, that is difficult to believe but the markets are slowing the ascent of CNH. The direction remains (CNH stronger versus USD) but the speed may continue to slow.  The levels to keep an eye on are 6.40 and then the target level of 6.30. Below there, the 6.05 area is the strongest the currency has been (2014) and that can quickly be seen once the new administration begins to remove the current restrictions on China.