The dollar continued to remain “bid” against most currencies last week and the economic data pointed to more inflationary pressures. Friday’s employment report was a very good surprise for those who want to see the economy growing! 850,000 non-farm jobs were added in June, that is the highest number in 10 months coupled with the unemployment rate having moved to 5.9% (previously 5.8%). Moving forward, we will be keeping a close eye on wage growth which is a number that jumped to 3.5%. The increased government payments to unemployed workers are forcing employers to increase wages and offer other benefits!

There are three key developments that may have a longer impact on various currencies.

First, a large oil pipeline burst in the Gulf of Mexico.

Second, oil prices have risen above $75/bbl.

Lastly, more European cities are requiring masks as the Delta Covid variant is making its way across the continent.

Each by itself will have an impact on the dollar, but combined these will drive up inflation while slowing down the European economy. Could this be a reason the U.S. 10-year yield settled at under 1.44% (1.437%)? Does the battle between these forces cause the market to want dollars and U.S. treasuries? Let us assume this is true. This would not drive inflation any higher initially, because the European slow-down will hold a brake on growth. On the other hand, with demand for oil higher along with lack of supply by the U.S and potentially Mexico, the energy sector can drive lasting demand.

EUR (1.1860): The currency could not bounce back last week, and now it is back to the lows that had been short-term support. As we mentioned, the resurgence of the Covid variant in Europe will keep EUR demand limited. The ECB did nothing with their QE program, it does not seem as if they are ready for cut in their monthly purchases. The negative German 10-year interest rate is not creating demand either. We expect further weakness in the next several weeks. Positive Covid numbers will be putting an “offer” on the EUR, so expect a test of the 1.1704 (March 2,’21) and then the 1.1668 level. The latter being key to a longer-term recovery. 1.1980 (June 25) will be a key level of resistance.

Economic releases: Markit PMI (Mon), Factory Orders, Retail Sales, ZEW survey (Tues), Industrial Prod. (Wed), ECB Special Strategy Meeting (Thurs), Industrial Output (Frid.)

Resistance: 1.1885, 1.1980; Support: 1.1820, 1.1704

GBP (1.3845): Hope Springs Eternal. Will the UK economy fully open after the Delta variant has slowed down progress? That is the hope, and we are all rooting for that. GBP, on the other hand, is holding on to the current support levels of 1.3750 and 1.3670. From a technical perspective, the short-term set-up has the pound moving a bit higher toward 1.3900/1.3950. The more worrisome pattern is a head and shoulders top that has a neckline at 1.3750, any break below of this would reverse all the gains for the year! We will be watching this closely. Those that need to make payments in GBP may have a chance to pick-up a much cheaper pound.

Economic releases: Markit PMI (Mon), Markit Const. (Tues), Halifax House prices (Wed), Trade Balance, Industrial Production, Index of Services (Fri)

Resistance: 1.3900, 1.3950; Support: 1.3750, 1.3670

JPY (110.95): More of the same trading with the yen as it has been for the last several weeks. The struggle for yield enhancement is battling the need to purchase the currency for a safe play. Twice the USD tried to move above 111.65 last week and both times failed! The USD sell-offs have been limited to 110.90/111.00. We are concerned that the trendline support at 110.70 may give way this week, leading the USD back toward 110.00. We recommend buying some yen ahead of the support area. There is nothing wrong with licking in a portion of your yen needs at these levels.

Economic releases: Overall house Spending (Mon), Leading Economic Indicators (Wed), Eco Watchers Survey. Money Supply (Thurs)

Resistance: 111.65, 112.00; Support: 110.70, 109.50

CAD (1.2360): The Canadian is again stuck between rising oil prices, higher inflation, and a recovery in the US dollar. Oil is beginning the week above $75/bbl., and eyes will be in the summer demand and the underwater pipeline rupture in the Gulf of Mexico. While this is the immediate and obvious focus, we also must keep in mind that the BOC was the first central bank to cut its QE program (CAD positive) and will do it again in the 3rd quarter. Market followers are expecting the US dollar to fall back to 1.2000 or lower. This has been our view as well, but with the US dollar still holding strong in the face of higher oil prices, we will not be surprised to see the US dollar rally to 1.2700 in a move to squeeze the USD shorts. We are not expecting this to change the longer-term trend of the US dollar (1.1800).

Economic releases: BOC Business Survey (Mon), Ivey Purchasing Managers Index (Tues)

Resistance: 1.2370, 1.2450; Support: 1.2320, 1.2200

MXN (19.8500): The surprise rate move two weeks ago has put a “bid” on the peso. Last week’s sideways action provided another opportunity for peso buyers to accumulate more inventory of currency, especially in the forward market (points are a “Pick-Up”). We still believe that the USD will fall against the peso, with 18.85 as a target.

Economic releases: None

Resistance: 20.1000, 20.7000; Support: 19.7500, 19.4500

CNY (6.4600): Price action has been subdued. The PBOC will be managing the currency, Chinese bank debt as well as the global initiative by central banks to add to their Chinese renminbi holdings. This is another subtle move to create more demand for the CNY. We have maintained a view that the CNY will continue to strengthen as demand for the currency continues.

Economic releases: FX reserves (Wed)

Resistance: 6.4800, 6.5000; Support: 6.4500, 6.4000