FX Weekly

FX Weekly Update – July 18th, 2022

Posted Under: Weekly updates

The dollar maintained previous week’s strength and will continue at least through the end of the 2022. The Fed rate hikes will be one reason, but the need to purchase U.S. treasuries at their current yields will also be supportive of the dollar. One of the most difficult themes in the current market environment, higher yields, then those fall, and their rally back, may be a result of 1) the need to purchase U.S. treasuries and 2) the market expecting a recession that will cause the Fed to stop raising rates, and even cut them. By definition, a recession is confirmed with 2 consecutive quarters of negative GDP growth. We have Q1 as negative, and the Atlanta Fed is forecasting a –2.6% fall in Q2. We can say there is a recession already, but the inflation numbers continue to move higher. The Fed is stuck in a situation that is difficult. Rather than the dollar being sold, this conundrum is supporting the dollar.  

EUR (1.0100): Last week’s euro low of 0.9950 happened quickly and the single-currency recovered in a very lethargic trade. The euro hourly chart is building momentum for a test of 1.0125 and 1.0190. This does not change the overall trend of the currency pair with the same issues that have been pushing lower remaining. The market is short euro, and this move higher is some profit taking. We always believe that when a currency makes a quick move to unfamiliar territory (0.9950) and quickly moves away, the market will go back to that area as either another test or to push through.  

GBP (1.1905): The sterling remains on its key support area. (1.1900). The pound did fall to 1.1760, and like the euro, bounced back to the current area. Nothing has changed in terms of the drivers behind the weak GBP. Resistance comes in at 1.1975, and 1.2050. We expect another test of 1.1750, before the Fed’s July 27th rate announcement. The question of 0.75 bp or 100 bp’s will keep the sterling under pressure.  

JPY (138.35): Another round of yen weakness has pushed USD/JPY to levels not seen since July of 1998! This area has been a critical level in the past and we should look at this as a reason to purchase yen for future payments. Utilizing a forward or a GreenShootsFX yen account to hold these will cheapen up future expenses. The largest risk we see is if there is an unwinding of yen cross currency positions. This would be the result of a disruption in the equity markets. Buying yen and selling dollars or other currencies, can quickly push USD/JPY to 125.00 and lower. Trade defensively!  

CAD (1.3000): The Canadian dollar is trading defensively. Another way to think about it: those who have been getting short USD/CAD, have not been able to get a return for their risk. They have been covering up positions, which is now keeping the pair well bid. Be it the interest rate differences between the two or oil prices rallying and falling, the market is wary of getting short USD/CAD. Buying U.S. dollars at 1.3000 may offer a quick flip of the position near 1.3300.  

MXN (21.4800): Last week’s dollar rally pushed the peso to its lowest level (21.05) since March ‘22. There is no question that we have been bearish USD/MXN for some time but the support at 19.50-19.70 has been too difficult for the dollar to fall through. Now, there is a strong chance that the overall U.S. dollar strength will push the dollar to 21.8000. Again, this weak peso does directly impact U.S. companies with maquilas. We always believe buying pesos as it weakens is a terrific way to cheapen that manufacturing cost, at least the payroll and rent!  

CNY (6.7550): We discussed the potential jump in USD/CNY last week. Combining both the overall U.S. dollar strength and the potential close of parts of the Chinese economy, there is no surprise the CNY has weakened. The key level is resistance (the old high) of 6.8400. This is a large level for the dollar. A close above will trigger stop-loss buying. A return to the 2020 highs of 7.1950 will be a test for the PBOC.