The U.S. yield scenario continues to defy the economic numbers that continue to show inflationary pressure. The yield on the 10-year fell below 1.29% before recovering and ending the week at 1.33%. CPI (0.9%) and PPI (1.0%) were released, and both came in higher than forecast. Retail sales, released on Friday, also showed a strong consumer. The 1.3% increase pushed yields lower and the U.S. dollar continued the rally it began at the end of May.

The confusing nature of an economy quickly recovering from a pandemic has traders doing their best to figure out which indicators they should be following. The economic numbers point to higher inflation, which should drive interest rates higher and support a stronger dollar. The Fed continues to call the current price pressures as “transitory”. We believe that this transitory inflation will not result in long-term price increases, but we also do not believe that it will not fall back to pre-pandemic levels. Energy prices will remain strong, with a combination of demand growing and supply under pressure. OPEC did decide to increase supply, and oil prices did fall, but the lack of supply from the U.S. will have an impact on prices and that means higher oil in the future. Friday’s closing price of $71.45 was well off the July 13^th high of $75.25, but most market analysts are looking for a level near $100.00 within two years. Commodity prices have fallen back to earth but remain high.

The current dollar strength does reflect the stronger economy and the eventual rise in rates.  Technically, the greenback broke down from the long-term trend and has most likely entered a decade long bear market. The current strength is carving out a classic technical retracement. Selling into this will benefit importers as they are able to secure foreign currencies at attractive levels.

EUR (1.1800):  The euro slid lower last week without much support. The single currency is within range of the important 1.1615 major support zone. We believe that the rally in the dollar (weakness in currency) is nearing completion. Thursday’s ECB meeting on rates will be the highlight for the market and, further, the ECB has not been clear in how they plan to exit QE, and there is no expectation that this week will provide anything new. But there is always a chance that they may provide more information on the future of their rates. Those looking to purchase EUR should be prepared to leave orders at levels in the mid to low 1.17’s and possibly as low of 1.1650!

Economic releases: ECB interest rate release (Thursday)

Resistance: 1.1850, 1.1900; Support: 1.1705, 1.1615

GBP (1.3755): A spike in covid cases over the past week has the pound on the defensive. The weakness (hourly charts) points to a test of the major support level, and previous low, of 1.3668. Like the EUR, the weakness may be coming to an end but the one issue that makes it difficult to look for a bottom, is the Covid variant. Buyers of GBP should be looking to buy a piece of their sterling need at levels near 1.3700 and again at 1.3675.

Economic releases: Retail Sales (Friday)

Resistance: 1.3800, 1.3875; Support: 1.3720, 1.3668

JPY (109.90): The yen has traded in a tight range with little activity to discuss. The major question for the yen and Japan is how well will the Olympic games proceed, where two athletes have tested positive for Covid already? The cost of this Olympics is extraordinary, and with no fans, outside of TV rights not sure how they will pay for it! Technically, the yen is dealing below a trend-line which should push the currency higher against the dollar. Historically, the pair reflect the yield of the U.S.10 year, and of course with that falling, it would make sense for the USD/JPY to fall as well.

Economic releases: CPI (Monday), BOJ Monetary policy, Merchandise Trade Balance (Tuesday), Health-Sports Day (Thursday)

Resistance: 110.20, 110.50; Support: 109.50, 108.80

CAD (1.2640): The Canadian dollar was gaining strength early last week up until OPEC’s decision to increase oil supplies, taking oil from near $75/bbl. to the current $71/bbl. Add to this the U.S release of retail sales, and you’ll understand why CAD fell quickly. We had expected this move and believe there is more room for it to weaken, thus we are looking at levels near 1.2700 and possibly 1.2800.

Economic releases: Retail Sales (Friday)

Resistance: 1.2650, 1.2700; Support: 1.2590, 1.2550

MXN (19.9500): The peso has held up well against the dollar, even as the dollar gains strength against most other currencies. We have mentioned many times that the peso does well as long as the U.S. economy does well. The retail sales report was positive and that keeps the peso from falling too far. Hedge peso expenses as far out as your forecasts provide visibility.

Economic releases: none

Resistance: 20.10, 20.30; Support: 19.80, 19.60

CNY (6.4830): We continue to monitor any developments between China and Taiwan, and China and the U.S, along with any new trade news with Europe. Early this week China will announce their interest rate scenario. Always difficult to predict, but they have defended the 6.4000 area and that may give a slight hint that they may lift their interest rates. Commodity prices have fallen and that does provide some support for their economy.

Economic releases: Interest rate decision (Monday)

Resistance: 6.5000, 6.5500; Support: 6.4000, 6.3500