FX Weekly Update – July 11th, 2022
Posted Under: Weekly updates
Last week saw the dollar pushing higher. The end of the week non-farm payrolls number in the U.S. (+375K) was stronger than expected, and the unemployment rate remained the same at 3.6%. Treasury yields moved higher after a week where they were under pressure. The 10-year had a weekly range of 2.76% – 3.095%, ending at 3.084%. To put that in context, the 52-week range is 1.123% – 3.501%! Oil prices rallied early in the week but as concern over a global recession they fell back to the $104.80.
The USD’s rally is intact but currencies like the euro (1.0180) and the GBP (1.2000), have found short-term support. This week is all about inflation. The CPI in Canada, Germany and the U.S. are going to be released, along with the PPI. Expectations for the U.S. numbers are +8.3% and 10.0% respectively. A higher number will certainly get the market thinking about additional Fed rate hikes. The next meeting is July 27 and the market expects a 75-bps rate hike. Depending on this week’s inflation reading, the market will be preparing for further 75 bp hikes, or adjust expectations, and expect less rate hikes.
EUR ( 1.0180): Last week’s low was 1.0071. The single-currency fell to that level quickly but bounced and remained steady at the current level where we now believe it’s setting up for a short-term rally. We expect a profit taking move to 1.0300, most likely ahead of the mid-week release of inflation numbers. Long-term, we remain bearish, targeting 0.8900. There will be a lot of noise around the 1.000 area, but that should not be as much of an issue for the falling euro and keep in mind that the record low is 0.8220, dealt in May of 2000.
The average euro rate, since 1998 is 1.1922. The Euro is near the bottom third of its 24-year range (0.8220 – 1.6038). Preparing to purchase some of your future euro payables is a great idea. 20% of it, or even 30%. Yes, we expect a lower currency, but layering into your hedges at these levels is prudent risk management.
GBP (1.2030): After a few weeks of political turmoil in Britian, Boris Johnson stepped down as prime minister. The sterling was under pressure, dealing at 1.1893 on July 6th, before bouncing after the news. The high on the bounce was 1.2046. This was a classic: “sell the rumor and buy the fact.” A further rally should find resistance at 1.2146 (July 5th high). Trendline support on the hourly chart is at 1.1950. A close below that level, it will fall to 1.1850, and then continue to 1.1500.
JPY (136.15): The sad and shocking news of former Prime Minister Shinzo Abe’s murder captured headlines around the globe. The yen remained in a tight range after the news. One would have expected another round of yen selling after this news, but the market was calm. Although Abe had been out of office for some time he was well liked by the Japanese people and world leaders. USD/JPY has been rising steadily each week. Major resistance is at 137.00 and then 139.50. Support on the hourly chart is at 135.30 and then again at 134.25. Yen volatility has fallen as the market is looking toward this week’s inflation numbers, meaning if the U.S. yields rise, then we would expect USD/JPY to rally.
CAD (1.2950): The Canadian dollar has been a very steady market. Canadian employment last week was disappointing. Their economy lost 43.2K jobs, when the market expected an increase of 23.5K. The BoC will announce their rate decision on Wednesday. Oil prices are dealing at $104.80, but President Biden will be meeting with the Saudia Arabian King late this week. Any indication of an increase in Saudi oil output will put pressure on oil prices and be supportive of USD/CAD which works well with our overall U.S. dollar strength. Near-term support is 1.2885 and then 1.2570. Resistance is 1.3085 and then 1.3280, which is a 50% retracement of 1.4495 and 1.2025.
MXN (20.4500): This must seem like a “broken record” but we do not expect most readers to understand that phrase. Another way to say it, the peso has been doing nothing of note. Support for USD/MXN is at 20.00 and 19.50. Resistance 20.7850 and then 21.5000.
CNY (6.6850): Price movement in the Chinese currency has been limited. The daily ranges continue to narrow, which indicates there will be a larger “breakout” move coming. The weekly chart has formed a “flag” pattern, which is a consolidation formation, which normally lead to an extension of the recent move. The recent move was from 6.3000 to 6.8400. The breakout move would then be back toward 6.8400. This would be resistance before the dollar moves USD/CNY toward 7.000.