FX Weekly Update – February 16th, 2021
Posted Under: Weekly updates
The main theme this week, as was the last, is the yield on the 10-year Treasury which climbed to 1.20%. This is the highest the yield has been in 12 months, despite the Federal Reserve continuing to discuss keeping short-term rates low for a long period of time. What is driving this move up in yields? Difficult to point to one economic report or one announcement but we can consider the markets expectation of inflation down the road. Recalling Fed Governor Powell had said several months ago an average inflation above 2.00% would be the hurdle for the rate hikes to begin. New Chairman Yellen hasn’t discussed this much but we can assume the policy remains the same until she announces something different. Why is this important for USD? The dollar is holding onto current levels as the market fights against the higher debt levels while rates move higher. Does inflation come sooner or is the concern about inflation just a worry that will not materialize? Some believe Bitcoin has now become a replacement for gold as an inflation counter. The asset or currency has touched $50,000, that is the high, and may be a signal for heating up prices.
Also this week; U.S. economic releases of CPI, PPI, retail sales, industrial production and housing information. That is a lot and will be looked at closely.
EUR (1.2120): The single currency has remained subdued and less volatile than other currencies. Former head of the EU, Mario Draghi, is now the Prime Minister of Italy. He is not affiliated with any political party and has two years to turn things around in the bloc’s third largest economy, behind Germany and France. The single currency has been mildly impressed. Heading into the new week, EUR is poised to rally and touch the 1.2150 area. We expect the currency can see a level closer to 1.2200.
GBP (1.3850): Nothing seems to want to slow down the rise in GBP. Ever since last mid-September the currency has not slowed from 1.2680. Technically, the next clear level has been one we have discussed before and that is 1.4400. This week will be key for the UK’s economic releases; CPI, PPI and retail sales will be released and should give some direction to potential inflationary pressures. We expect those to show a moderate up-tic but nothing that should surprise the market. Levels to keep an eye on: 1.3900, 1.4100 and 1.4400.
CAD (1.2680): Oil continues to climb and is now dealing just below $60.00/bbl. CAD has inched up but remains 100 points away from the USD/CAD level of 1.2580, which was the low in January. We would expect USD will continue to fall as oil and other commodities rise. The current level is a good time to purchase CAD whether you would like to hold the currency in a GreenShootsFX digital wallet or by using forward contracts. Resistance for USD is at 1.2900 and of course support at 1.2580 and 1.2450.
JPY (105.00): Last week saw the USD/JPY initially fall from a high of 105.67 to a low of 104.40 only to turn back and rally to the current 105.00. This week we would expect to see USD rally further and trade to 105.50. Equity markets are making historical highs and this is pulling more investors into the market. Selling (borrowing) yen at a cheap rate and investing it in higher yielding assets. A long-term trend line that connects the high of 112.20 (2/20) to last week’s high should prove to be important. Any USD/JPY close above that can set in motion another push higher to 107.50 and can also mean equity markets will continue to move higher, which in turn drive USD/JPY higher again. Support for USD/JPY is 104.74 and 104.40 while resistance comes in at 105.50, 106.10 and 107.50.
MXN (19.90): The peso is sensitive to a few things that we should highlight. 1) a strong U.S. economy creates demand for products manufactured in Mexico and that is bullish for the currency, 2) higher oil prices are good with the Mexican economy and will also push the peso higher and lastly, 3) the interest rate difference between USD and MXN. We have a stronger U.S. economy, we have higher oil prices but the Central Bank of Mexico cut their rates by 0.25% to 4.00%. Couple that with rising yields in the U.S. and the USD/MXN is struggling to 19.50 (low from late January). GreenShootsFX believes the USD will weaken and ultimately move close to 18.50. While these current levels are trending sideways they remain a great area to accumulate or purchase using forward contracts to take advantage of the spot level but also the forward points, which favor the buyer.
CNY (6.4175): 6.40 is holding in as good support for USD but it will be just a matter of time before that gives way and USD/CNY will make a move toward the February 2018 low of 6.2350. Several variables to consider; The policy between the U.S. and China will need to unfold and as commodity prices rise (metals, oil and agriculture) the pressure on China to adjust their rates higher will also put pressure on the dollar. Here is the weekly disclaimer; CNY remains under the control of the PBOC. Although we are comfortable with the forecast that USD/CNY will move lower, the Chinese government can push the currency lower if they feel it is moving too quickly or to make a policy statement.