FX Weekly

FX Weekly Update – January 3rd, 2022

Posted Under: Weekly updates

2022 begins with the dollar slightly higher than a year ago. The 5.7% gain over the last 12 months was an impressive haul after falling through April. Interest rates, inflation, and safe haven buying were the three reasons the dollar defied the forecasters. Add the fact that the market was short dollars, the rally squeezed those positions and fueled the rally further.

What are we thinking for the next 12 months and beyond? Inflation is forcing consumers to change their shopping habits. Oil prices, which fell sharpy in the last quarter, are beginning to test the $80/bb Level and forecasts for $90 or even $100 this year. U.S. employment is looking very good but there are some 10MM unfilled jobs in the economy. This will have a positive impact on wages but that is another component of inflation. The impact of all these will push the Fed to raise rates sooner than they wanted, possibly in March, and that hike may be 0.5%! With this scenario, the dollar should continue to move higher. Currencies such as EUR, GBP and JPY will be at risk of falling substantially. The Mexican peso and Canadian dollar will most likely strengthen as oil prices are rising and the U.S. economy continues to

EUR (1.1370): A late rally at the end of last week pushed the EUR higher – late short covering was most likely the reason for the rally. Technically, the euro is still carving out a large “top” formation, which projects the currency to trade near 1.0500! Fundamentally, there are some major concerns for the ECB, especially as they decide which is more important, the EU’s strong growth? High inflation? Or what is going on at the Ukraine/Russia border? Each are important for the European economy but combining all of these while coming out of the pandemic, will be incredibly tricky. The first major level for the single currency is 1.1200, and resistance is at 1.1500.

GBP (1.3520): The sterling begins trading this year, near where it began last January. The currency lost 1.7% against the USD in 2021. It did gain against the euro, which does offer optimism as the U.K. continues to deal with trade agreements post Brexit. Last week’s activity was a low volume rally. We will watch how January develops but we would expect sterling to spend time near 1.3000 before the BOE hikes its rates and more positive trade flow pumps it up against the euro. Resistance at 1.3600 and support at the 1.3250.

JPY (115.20):  The yen fell the most against the dollar in 2021. The 6% move was driven by the strong global equity markets and the yield rally in the U.S. 10-year treasury. This year we are looking for USD/JPY to continue its rally. The first level is 116.00 then 120.00. Keep in mind if equity markets begin to fall, the yen carry trade will unwind quickly and yen buyers will cover their exposure. Support is at 112.50 and then 110.00.

CAD (1.2725): The Canadian dollar is dealing at the same level as it was 12 months ago. In that time, oil rallied 58%, U.S. equities closed at record levels, both the BoC and Fed began tapering, employment situations comparable…and the list goes on! The markets did not look at any of these as a reason to be long either the CAD or USD! Where do they go from here? Let’s consider the drivers behind the Canadian dollar: oil price, U.S. economic health, interest rate advantage. All three should be positive in 2022. For the USD? Weaker oil prices, economic health, higher rates. The only glaring difference is oil prices. We like a stronger Canadian dollar in 2022. 1.1800 is the logical level to target. 1.3200 is a major resistance area!

MXN (20.5000): The peso has taken a roller coaster ride this past year and we are not sure that ride is over! The peso strength over the last several weeks has set the tone for further peso appreciation. The 19.6500 area is an important level for the dollar. The 23.0000 level is also an area that would create real concern. Continued economic strength will support the peso, higher oil prices will also be supportive.

CNY (6.3650): The economic recovery in China continues to move forward. The real estate issues from several months ago have worked themselves out. The Chinese Navy is getting larger and with more technology. Why does that matter? Historically, the country with the strongest navy also had the strongest currency. The U.S. and China are in a race and the currency will be very important component to how economics will unfold. The PBOC continue to manage the currency. Recent news about the PBOC losing its power to the Chinese Government will make “guessing” which way the government wants to push their currency very difficult. 6.5000 /6.2500 range for the next 3 months.