FX Weekly

FX Weekly Update – February 7th, 2022

Posted Under: Weekly updates

The employment report on Friday was a welcome number. The surprise increase of non-farm payrolls of 467,000 supported the equity markets, U.S. yields (10-yr at 1.91%) and oil prices. That has some Fed watchers believing the Fed is going to raise rates in March (expected) but now there is a strong chance that hike may be 0.5%! Oil prices looked at the number as another positive for global growth and is now dealing above $90.00 bbl. But what happened to the dollar? Yes, it rallied against the Canadian dollar, peso, yuan and yen, but it has fallen against the single-currency and the pound. The overall USD value has remained quiet but against individual currencies the dollar is bouncing. Why? We have discussed the impact of non-USD cross pairs driving currency trading and last week was the perfect example. These cash flows do keep the dollar overall flat but it will bounce and fall based on when the flow into euro and out of JPY or GBP is happening.

This week all eyes will be on the commodity prices, U.K. and EU economic data, and the important U.S. goods and services trade balance (Tuesday) and CPI (Thursday). Inflation and jobs are the main concerns for the Fed and trading community. We cannot forget the Russia/Ukraine issue. Central banks across the globe are keeping a close eye on these developments. There is also the Bejing Olympics, which have already had some difficulties with weather conditions and overall athlete issues.

EUR (1.1460): After the previous week’s soft euro the currency found its strength behind the ECB’s Christine Lagarde changing her previous stance of no rate increase to the possibility of at least one rate hike in 2022. The ECB is walking a difficult path. The issue with the Russia/ Ukraine potential war, and the rising oil and heating oil markets, make it difficult for them. The decisions faced are do they raise rates to battle inflation while concerned about a war that may force them to cut rates? Resistance at 1.1500 and then again at 1.1575 should cap this rally. Support at 1.1400, and 1.1350 will keep the range tight. We like buying euro below 1.1200 and selling it at 1.1500 all the way to 1.1600.

GBP (1.3530): The sterling has several important economic reports this week that will provide some direction. Housing (Monday), GDP (Friday), Industrial Production (Friday) and Manufacturing Production (Friday) will provide insight into the British economy. GBP is still being moved around by the EUR/GBP trade. The pair moved in favor of the Pound the last two weeks but reversed on Friday which again caught euro shorts and helped push the pair higher. 1.3600 is our resistance level and 1.3500, 1.3425 support,

JPY (115.30): The yen has fallen on the back of the rally in equities and the rise in U.S. yields. This has been the theme with the currency for the last 12 months. We had discussed the yen falling toward 120.00 and with the current interest rate scenario and rallying stock markets, that level will be a great spot to buy.

CAD (1.2750): The Canadian dollar is the most volatile of the majors. The Canadian economy did not produce the jobs that were expected, coupled with the U.S. gains, put CAD on the defensive. Oil is above $90/bbl. to begin the week and that should strengthen the CAD even as their economy has slowed. This level is a good one to buy the currency, the impact of high oil prices will strengthen it. The BoC will most likely raise their rates in conjunction with the Fed. Some financial firms are forecasting 7 rate hikes by the BoC. 1.3000 is a major resistance area and the 1.2300 area is support.

MXN (20.8000): The peso fell last week on the overall dollar strength. This week, Banixco (Mexican central bank) will announce their rate decision. Some are thinking that they may hike 50 bps, others believe no rate hike so this could be a very volatile week for the currency. Be prepared to purchase pesos with a move towards the 21.25 level. If Banixco does raise rates, the forward points will become larger and using forward contracts, hedging future expenses will be much cheaper.

CNY (6.3700): The Beijing Olympics have all eyes on China where the country is just finishing their weeklong holiday. This can bring volatility back into the yuan and potentially push the dollar back toward 6.3000. We are strong believers that the CNY will continue to get stronger but at a pace that is slower because the PBOC will keep the currency from becoming too strong too quick.