FX Weekly Update – February 22nd, 2021
Posted Under: Weekly updates
Last week the dollar turned in a mixed bag. Falling against EUR, GBP and CAD but holding steady against MXN and CNY. Commodity prices were steady and equity markets were back near record highs. Bitcoin continued its strong rally and is now (Sunday afternoon) trading above $58,000. Another 4% higher than Friday! The U.S. 10-year yield has moved above 1.30% and is signaling concern about inflation. A major storm ripped through the middle of the country and the great state of Texas bore the brunt. Heavy snow and freezing temperatures idled the states power grid causing citizens to be without electricity and water. This is going to create another argument between the renewable energy folks (Texas gets about 25% of their electricity from wind, and those large windmills froze) and the fossil fuel lobby. Natural gas rallied throughout last week as the fracking business, specifically on public lands, has been shut down due to an executive order.
This week is going to be filled with economic reports in the U.S., U.K and Europe, along with the Fed’s Powell speaking to Congress. This comes at a time when the COVID relief bill will be heading to congress for a vote and concerns over a heating up of the economy takes center stage. The dollar will remain on the back burner (as it typically does) while the other markets continue to find value. While the headlines will focus on interest rates and commodity prices, corporate treasuries around the world will be dealing with the more expensive cost of “money” and the increase in foreign currency payables and less profitable receivables.
EUR (1.2130): Not much activity with EUR/USD, it remains in a range without much to speak about. In general, the euro area has had good economic data. The manufacturing and inflation numbers are coming in above expectations. There has not been much discussion by the ECB on raising interest rates and that is keeping the currency from jumping higher. It has fallen against GBP and that will most likely continue even with weak economic reports in the U.K. It has slowly gained against JPY but that is a result of the ‘carry trade’. Support for the euro is 1.2050 and 1.1980 while the resistance levels are 1.2200 and 1.2280. GreenShootsFX maintains our forecast of 1.2500 but this may be pushed back to Q2 as the cross-currency trades continue to dominate EUR activity.
GBP (1.4000): Wow! All we can say is “Wow”! GBP has not slowed, reaching a high of 1.4036 last week. Although their economic data has been really bad (lower retail sales, lower manufacturing) the currency continues to rise against all other currency pairs. Companies needing to buy GBP for their expenses are experiencing much higher costs! Those that have been buying the pound and holding it in our digital wallets are doing better! This rally is a great reason for a company to budget well and make sure they are prepared by using our digital wallets or forward contracts. Both will benefit long-term and protect their margins. Resistance this week: 1.4050 and then 1.4125. Support at 1.3930 and 1.3850.
CAD (1.2600): Last week we wrote about our frustration with the Canadian dollar but this week we will open by saying that we are witnessing the currency ‘catch-up’ to the oil market. The low for USD/CAD has been 1.2585 (several weeks again) and now that level is in danger. CAD is a “trend” currency. It will remain in a direction once it starts and that can last for several quarters. Canadian expenses are going to get more expensive, so be prepared. Companies that sell into Canada and are paid in CAD will be receiving more USDs. Companies that are afraid of the FX component of global sales will find that as USD falls they will see a benefit; in fact they should see more sales because it is cheaper for their customers. Support for USD/CAD is at 1.2585 and then 1.2525. Resistance will come in at 1.2675 and 1.2725.
JPY (105.30): The yen has held onto its gains after falling to the 106.00 area against USD. As the pair moves from 105.00 toward 106.00 the yen is falling and dollar strengthening. When it moves in the other direction (106.00 to 105.00) the yen is strengthening. The failure of USD/JPY to trade higher is again a bit frustrating but does show the correlation between the asset markets and the currency. If one believes that the equity, and other, markets are going to continue to rally then expect the yen to weaken, making Japanese expenses cheaper. Support for USD/JPY is 105.00 and 104.50. Resistance at 106.00 and 106.30.
MXN (20.40): The peso really has failed to rally the last two weeks and one recent reason is the storm in Texas. At least that is what the “talking heads” are saying. The storm has hit southern Texas and Northern Mexico (weather doesn’t care about borders). Laredo, Texas and Nuevo Laredo are major trucking hubs for product being moved into the States. The storm has closed those down or at least slowed the movement. The Central Bank of Mexico cut rates last week and signaled they may do it again. Although they still have a higher interest rate than the U.S. the gap is closing and the risk of owning peso assets is increasing. This fact should not deter companies that have MXN expenses to take advantage of the weaker peso. Companies should increase their purchases and extend hedges. USD/MXN support is at 20.00 and 19.50. Resistance at 20.75 and 21.00.
CNY (6.4500): Last week we sketched out the scenario that was keeping USD/CNY from falling through 6.4000. This past week the dollar jumped to 6.4500 and it remains there. This is always the issue with a government-controlled currency. We keep our focus on the goal of 5.85 but keep caution in our back pocket. Hedging Chinese expenses remains a very constructive idea. Politics are coming in to play but those will not be positive for USD. USD/CNY support is at 6.4000 and 6.3500. Resistance is 6.5000 and 6.6000.