Last week’s Fed announcement and the U.S. employment situation were the highlights for a wary U.S. dollar. The Fed raised rates 25 bps to 4.75%. The hike was expected, and the dollar slid. As quickly as the dollar fell, it bounced back on the news that U.S. non-farm payrolls increased by 517,000! Forecasts had been looking for 175,000. The unemployment rate is now at 3.3%, the lowest level in 50 years. 

The FX market has become murkier with a 0.25% hike and an employment situation that continues to be strong. The ECB and the BoE also raised their short-term borrowing costs. The ECB moved 50 bps to 3.0%, while the BoE hiked 50 bps to 4.0%. These adjustments were in line with forecasts.  

Last Friday, news broke that there was a Chinese balloon over Montana. The market had closed for the weekend and was setting up for volatile trading sessions. One scenario: Trading will be erratic, with liquidity pockets. Another (most probable) scenario: markets will be sensitive to news, which may lead to a quiet week. The U.S. military shot down the balloon after it moved out over the Atlantic Ocean near South Carolina. China called the decision to bring down the balloon a “serious violation of international practice” while saying Beijing “reserves the right to make further responses if necessary.” China’s Defense Ministry issued a similar comment, calling the shootdown an “obvious overreaction.” This rhetoric will put a “bid” under the U.S. dollar, a safe-haven currency.  

EUR (1.0720): The single-currency jumped to 1.1038 after the Fed and ECB raised rates and then took an “about face” ending last week at 1.0820. With the news of the Chinese balloon flying over the U.S., cash has passed into U.S. assets, pushing the dollar higher to begin this week. The current level, 1.0720, deals at a primary support zone on the 4-hour chart. The target for euro weakness is 1.0480 (low on January 6). Resistance is at 1.0820, then 1.0950. 

GBP (1.2010): The sterling touched 1.2447 on January 23 and is now 3.5% lower. Like all currencies, the selling accelerated after the Chinese spy balloon moved into the U.S. There will be further long GBP positions liquidated, keeping a “lid” on the sterling. The 2023 low of 1.1838 is the measuring objective for this move. A close below that low would then open a move toward 1.1229! The EUR/GBP (0.8918) is near the upper band of its long-term (post-Brexit) range. This may cause further volatility if the pair rejects that level (0.9250).  

JPY (132.75): The current rally in USD/JPY has broken the upper band of the range it had followed since its high point of 151.95. The current level is at the 50% retracement level, calculated from the 113.46 low (January 23, ’22) and the 151.95 high. The support levels of 127.20 / 128.00, the 61.8% retracement, will be a major level and, if “given,” will further strengthen the yen. Our target for the yen is 123.00. On the flip side, a close above 132.50 can push USD/JPY to 135.60.

CAD (1.3445): The Canadian dollar is weakening for two reasons. Oil prices had fallen to $73/bbl, and the issue with the Chinese balloon. The balloon did travel through the Western third of Canada before entering the U.S. in Idaho. The Canadian employment situation will be released this week (February 10) and will most likely create 17.3K non-farm jobs. The market is also digesting the last BoC rate hike in January, which brought their overnight rate to 4.5%. The question that will be answered with the employment numbers is how strong is the Canadian economy. A number that reflects a report similar to that in the U.S. will push Canadian interest rates higher and support the Canadian dollar.  

MXN (19.1500): The peso has weakened 4.3% since last Thursday. After touching 19.29, peso buyers have come in and are taking advantage of the weakness. The 18.5000 low from last week will now be a support area for USD/MXN. Forward points remain attractive. The six-month points are +0.6300, which would be an outright forward level of 19.7800!  

CNY (6.8020): The market has reacted to the Chinese / U.S. balloon incident. How does this impact the opening of the Chinese economy? Will China retaliate? Will there be a trade war? Oil prices are lower and reflect the potential issues that may arise. The recent dollar low of 6.6940 will be critical support, while 6.9500 is resistance.