Happy New Year!

The 2022 story for the dollar was evident—interest rates. While the Fed and the talking heads at financial institutions were talking about inflation as “transitory,” reality saw inflation move to the highest levels since 1980! The Fed was behind the curve and quickly raised rates which underpinned the nearly year-long rally in the dollar. Other major central banks raised rates, but the Fed set the tone. The ECB was slow to react as it had to deal with the Russia/Ukraine war, rising energy prices, and concern that Covid-19 would continue to ravage its economy. All change in November when the ECB raised 75 bps, and President Lagarde’s speech made it clear that higher rates to fight inflation would continue until the ECB sees inflation slowing down. The dollar ended last year at its lowest level since reaching the high for the year in August.

Where does the dollar go from here? The current level (103.50) is a significant support level, which should keep the dollar from falling further, at least in the short term. The next level of support is at 89.00, which would bring the currency to its May 2021 area. What should we be watching in 2023?

• Inflation! Energy prices are the coin flip. Together these will underpin central banks’ decisions. China is trying to open its economy quickly after its severe Covid-19 closedown.
• Will the Fed move the Fed Funds rate to 5.25%-5.50%? Currently at 4.25%-4.50%.
• How will the next two years of the Biden administration impact the market? Higher taxes and more spending are the two most important factors.

EUR (1.0650):  1.0700 has proven to be a strong resistance, which aligns with the USD index level of 103.50. Liquidity has fallen over the last several weeks which should change this week. A close above 1.0700 would push the single-currency to 1.1000. Getting short euro between those two levels would be an excellent way to capitalize on the short-term rally. Support rolls in at 1.0350 and again at 1.0175. GSFX suggests building a long position when the currency falls below 1.0500, selling a part of that position above 1.0700.

GBP (1.2040): The sterling is 17% higher than its low of 1.0295, traded on September 25, 2022. The BoE has been raising rates (they were the first central bank to do so), but it has yet to support its currency effectively. The 38.2% Fibonacci retracement is at 1.1600; trendline support comes in at 1.1800. Resistance has been strong at 1.2500. The 17% rise in the GBP has been impressive; there needs to be a sense of urgency to buy the currency at the current level. Selling against 1.2500 and looking to buy at 1.1800 is the short-term play.

JPY (130.70): 151.94 (October 16,’22) was high for USD/JPY, and now, after BOJ intervention (selling USD/JPY) and their change in the short-term interest rate, the currency pair is 14% lower. The impact of their rate change, which has been in place since 1988, does give the market pause. While selling yen and buying other currencies (carry trade) has been a driver behind the weakening currency, that has now changed. The yen will continue its strength, while any weakness toward 135.00 should be purchased (buy JPY, sell USDs).

CAD (1.3570): The story behind the CAD is simple. The BoC has been raising its short-term rates, mirroring the Fed. Oil prices have fallen from $123/bbl to the current $80/bbl. That is a negative for the currency. USD/CAD should continue its weakness and test last year’s level of 1.3977. GSFX would like to sell U.S. dollars if the currency pair moves above 1.3700. Oil prices will remain volatile. Russia will slow down production because of the EU’s “cap” on energy prices. China is opening up its economy and will increase the oil demand. Together, higher oil prices will increase, and the Canadian dollar will gain strength back toward 1.2800.

MXN (19.5000): Out favorite currency to discuss. It just doesn’t follow the usual path. Why? The Central Bank of Mexico raised their rates in December by 50 bps to 10.5%! That was the thirteenth rate hike since they began tightening. USD/MXN has fallen 11% throughout 2022. The 6% interest rate difference between the two currencies should have the pair trading at 18.0000. But support has been strong at the 19.35-19.50 levels. Is the central bank supporting the dollar? Does it feel that a stronger peso harms their economy and competitiveness? GSFX remains bullish on the peso. A core long peso position, adding to it if the pair moves toward 20.0000, especially utilizing forward contracts for their interest rate pick-up.

CNY (6.9200): The Chinese government is quickly opening its economy, which will drive higher commodity prices. Along with higher prices, the CNY should strengthen. The demand for the currency will push the currency pair toward 6.5000. Two lines of support to be aware of: 6.8400 and 6.6600.