FX Weekly Update – July 26th, 2021
Posted Under: Weekly updates
Academic conversation would say that a currency should rise and fall with the interest rates of that country. Rising rates, stronger currency, falling rates, weaker currency. Last week supported that theory. The yield on the U.S. 10-year began the week at 1.27%, fell to 1.14%, then rallied back to 1.27%. The USD followed that pattern, falling and recovering for an “unchanged” week. U.S. equities did the same, with a 1000+ point fall on Monday, only to end the week in record territory!
The Wall Street Journal reported that international fund managers plowed $900 billion into U.S. funds in the first half of 2021. The largest flow since 1992! This is the most obvious reason that the dollar has been as strong as it has been. Interest rates have been the other. Both Europe and Japan’s 10-year yield remain at 0.00%, so the paltry 1.27% for the U.S. seems like a major win.
This week will prove another difficult one for currency traders. The U.S. calendar includes home sales on Monday (there has been some weakening in this sector), durable goods on Tuesday (a very volatile number), the Fed interest rate decision on Wednesday (all eyes on any indication of tapering), pending home sales and GDP on Thursday and PCE on Friday.
The below WSJ article on the dollar is a very good read on why it is hanging onto its strength:
EUR (1.1795): Last week’s 75 pip range left the single currency unchanged on the week. The story in Europe is the Delta Covid variant and the increasing number of infections. Another round of close downs would not be a good thing for the already stalling economic recovery, thus could get worse. The ECB did not change its rates or bond buying program where the market was hoping for some change, but was disappointed and sold off the EUR. We continue to emphasize buying dips and either using forwards to match future cash flows or utilize the
GreenShootsFX EUR currency accounts.
Economic releases: German current assessment, business expectations, unemployment (Monday), business and consumer confidence (Wednesday), German unemployment, CPI, Euro-zone consumer confidence (Thursday), German GDP (Friday)
Resistance: 1.1810, 1.1830,1.1870; Support: 1.1750, 1.1700
GBP (1.3760): Like the euro, it is more about the number of cases of the Delta virus and potential shutdowns than it is anything economic. The biggest development for the sterling last week was the reversal against the euro! EUR strength against the GBP prior to the ECB announcement, added to the lack of movement, but after the ECB decided to leave their policy as is, it was followed by the single currency falling, again, leaving the EUR/GBP favoring the pound (0.8550).
This week there is an empty economic calendar but, again, it’s about the rate of infections that matter. The sharp fall to 1.3519, and quick bounce back to 1.3760, does give hope for the GBP bulls. Strong resistance at 1.3910 will cap any rally that does not have momentum.
Economic releases: none
Resistance: 1.3780, 1.3910; Support: 1.3519, 1.3420
CAD (1.2560): Last week’s inability for the U.S. dollar to remain at or above 1.2800 was followed by a quick sell-off back to the current level. Oil prices recovered after their sell-off on Monday, July 19th. One positive note about that, clearing out stop-loss sell orders provide confidence for long positions in oil, helping prices. This should also help support the Canadian dollar. We are looking for an early 80 pip fall in USD/CAD this week. Target 1.2460 for this move.
Economic releases: CPI (Wednesday), GDP (Friday)
Resistance: 1.2610, 1.2670; Support: 1.2520, 1.2440
JPY (110.50): Last Monday’s early collapse (109.06) in the USD/JPY followed a common pattern i.e. moving in tandem with the U.S. 10-year interest rates. The bounce, back to 110.50, again followed those yields! Yen buyers, those that need to make payments, should find this recovering dollar a relief but also a time to begin hedging or collecting yen in a GreenShootsFX yen account. The next area of resistance, 111.50, is a very important one. Buying a higher portion of those yen payables ahead of that level would be prudent. Failure of the dollar to rally above 110.70 may be a signal that the USD rally has run its course.
Economic releases: Retail trade, Industrial production (Thursday)
Resistance: 110.70, 111.50; Support: 109.95, 109.06
MXN (20.0500): The peso has had very limited movement since the rate hike (4.25%) in late June. The range since has been 19.70/20.1350 and the dollar begins this week near the higher end of the range. There are no economic reports for Mexico this week. We will continue to suggest, as we have for many weeks now, companies with peso expenses should always use the forward market to buy pesos, matching those anticipated cash flows. The interest rate difference gives the peso buyer a cheaper peso and taking advantage of what the market offers, is smart risk management.
Economic releases: None
Resistance: 20.1350, 20.75; Support: 19.82, 19.60
CNY (4.4730): Very little activity with USD/CNY. We know that the dollar was supported at 6.4000 by the PBOC at the end of April. The political issues that will be moving the U.S. / European and Chinese are developing.
Economic releases: None
Resistance: 6.5000, 6.5500; Support: 6.4500, 6.4000
USD INDEX: Monthly 1987-present
The long-term dollar index has had very dependable patterns. One, which we have highlighted, is the decade long change in a trend. Whether it is 9 years or 11, keeping an eye on a 10 year change is helpful in forecasting your business revenues/expenses. We want to highlight the last year of trading:
Once the dollar made a clear break of the rising trend-line that began in 2011, the initial move was quick below 90.00. Since then, there has been a rally, consolidation and another rally back to the original long-term trendline! This type of price action is very common and should not create a change in our overall ‘long-term dollar lower’ determination.
GreenShootsFX would like to be your FX partner. We want to execute your transactions and discuss risk management plans. We also want to answer your questions! Never hesitate to reach out if you have questions about technical analysis, trading concepts or best practices in risk management!