FX Weekly Update – July 12th, 2021
Posted Under: Weekly updates
Firstly, let’s not talk about the UEFA European Championship final given one of our co-founders is from England.
The market continues to trade the dollar from a defensive position which, in other words, means it remains well supported. We do not see a change in this given more positive Delta covid cases continuing throughout Europe which is challenging to health providers, businesses and politicians. If you also include the central banks and their struggle with timing on rate hikes and tapering of current bond purchases, the dollar remains a safe haven. The yield on the U.S. 10 year fell to 1.28% last week, before ending at 1.35%. The demand for U.S. treasuries, even at these lower yields, does provide a clue for the dollar’s recent strength. The data released in the U.S. was not damaging or encouraging: ISM services data showed a slight decrease, while the job openings remained at 9.2MM. There is some talk in the markets that these weaker service and manufacturing numbers are singling a slow-down in the economy. We will need more information than the few numbers from last week to determine what path the U.S. economy is headed.
EUR (1.1870): The Delta variant has been impacting the European countries and causing more cities to consider a tougher stance on their citizens. The ECB’s laggard announced that the central bank will now consider inflation around 2% versus their previous view that 2% is the line in the sand, when considering raising rates. Like the Fed, the average inflation of 2% means that if inflation creeps above 2%, that will not now be an automatic trigger to raise rates. The euro rallied on this news from the week’s low of 1.1773 to the current level opening this week. Technically, the last four weeks have carved out a channel pattern, a daily close above 1.1900, should lead to further strength toward 1.2075.
Economic releases: ECB’s De Guindos speech (Monday), PPI (Wednesday), CPI (Friday)
Resistance: 1.1895, 1.1940; Support: 1.1830, 1.1785
GBP (1.3900): Following the euro bounce late last week, the Sterling increased 150 pips on Friday, from the low of 1.3755 and this should set-up a further strengthening for GBP as the week opens up. Considering last week’s data releases, the late week rally is a relief for the currency bulls. Both manufacturing production and GDP missed their estimates, which had the sellers pushing the currency toward the 1.3700 level, thus shaking off bad news and rallying is a positive for GBP.
Economic releases: CPI, PPI, Retail Sales Index (Wednesday), Average earnings, including bonus (Thursday)
Resistance: 1.4000, 1.4080; Support: 1.3850, 1.3750
JPY (110.10): The USD had a wild ride last week against the yen falling from the high of 111.65 on July 2nd, to Thursdays low of 109.53, before bouncing back to the 110.10 level. The dollar selling was more of a “buy yen, sell dollars, euro, and pounds” as the equity markets jumped up and down. The dollar rally was quick, based on the news that China and North Korean leaders met and announced that they will be working more closely. This should worry Japan, along with other countries.
Economic releases: Machinery Orders, PPI (Sunday), Industrial Production, Capacity Utilization (Wednesday), BOJ (Friday)
Resistance: 110.50, 111.00; Support: 109.75, 109.50
CAD (1.2455): Oil prices remain elevated, dealing at $74.65 bbl. The Canadian dollar, though, had fallen last week to a level of 1.2590 before reversing to 1.2455. Canada did release their June employment report last week, which logged a gain of 230,700 jobs (forecast 195K), with the rate falling from 8.2% to 7.8%. Good news, great news! But all the jobs were part-time. The year’s long rally in the Canadian dollar has been impressive, following the rally in oil. The recent dollar bounce may be more of a sign that the currency got ahead of itself, than any change in the direction of both oil and the Canadian dollar! We believe that the current fall in the U.S. dollar (from the 1.2590 level) may be retracing back to the support area of 1.2400. If this level holds, the U.S. dollar will stage another rally to 1.2650.
Economic releases: Manufacturing Sales, BOC Interest rate decision (Wednesday), ADP employment (Thursday),
Resistance: 1.2500, 1.2590; Support: 1.2425, 1.2350
MXN (19.8500): Last week was uneventful for the peso where the range was tight (19.76-20.16) after the previous weeks of high volatility. The peso is setting up for another rally against the USD. The 19.8000 level will be a support area for this week, followed by the 19.5000 level. When we look at the peso, their interest rates, oil prices, the U.S. economy, all point toward a stronger currency. We will continue thinking that these current levels remain a great place to buy pesos, using forward contracts, to lock in future expenses.
Economic releases: No data this week
Resistance: 20.1500, 20.3000; Support: 19.8000, 19.5000
CNY (6.4800): Developments in China are beginning to grow and become more apparent in their direction. From a currency perspective, the latest report on the PBOC activity, showed that several weeks ago, they purchased USDs through their banking system, while announcing the increase in banks foreign holding of FX. This essentially put a floor in the USD/CNY at 6.3500/6.4000.
6.5000 has become a good level of resistance. We will need to look into the policies of China, versus the currency activity, to develop a longer-term forecast for the currency. We have long said that the CNY should be dealing at 5.8500. With the relationship with North Korea, China openly discussing taking Taiwan back and nearly completing its takeover of Hong Kong, there seems to be enough long-term political and military determination to become a much more meaningful global influence.
Economic releases: No data this week
Resistance: 6.5000, 6.5500; Support: 6.4000, 6.3500