FX Weekly Update – June 1st, 2021
Posted Under: Weekly updates
This week the dollar begins in familiar territory sitting near its recent low, even after some positive economic news! Durable goods ex. transportation (1.0%) GDP (6.4%), initial jobless claims (406k), personal consumption expenditures (3.6%) and finally, personal income (-13.1%). All of these numbers were better than expected, but the dollar could not sustain a rally. The 10-year yield ended the week at 1.58%, well below the week’s high. Each of these economic indicators suggest inflation, and yet the market is not reacting to them. The concept of “transitory” inflation, meaning the re-opening of the economy, and its pressure on commodities, etc, will subside over the next quarter or two. This is the underlying premise of the Fed’s decision to keep rates low and not taper any time soon.
The shortened week ahead includes ISM manufacturing, construction spending and ending the week with the employment report. Estimates are for an increase of 621K non-farm jobs and a rate of 5.9%. This report will be particularly important after last month’s disappointing growth of only 266K.
EUR (1.2200): The least exciting currency out of the majors. The ranges have been small and the lack of follow-through, on either side of the market, disappointing. After the inflationary numbers last week, there was some excitement when the bears took over and the euro began to fall, but that was just 60 pips before turning around and rallying back to 1.2200. From a trading perspective, the action is symbolic of a favorable market. When information is negative for the currency, and the currency does not fall, then that is a solid indication that the least path of resistance is higher!
Economic Releases: German CPI, Eurozone inflation
Resistance: 1.2240, 1.2300; Support: 1.2140, 1.2080
GBP (1.4175): “Nothing to see here” would be the best way to describe last week’s action and the start of this one. GBP did have similar action to the EUR, and we remain bullish for the currency. There should be good resistance at the 1.4230-40 area, which were the two highs in 2021. Technically, the last two weeks of activity have formed a ‘triangle’ pattern, with an objective of 1.4330. Typically, the objective is met within half of the time it took to build the pattern and this triangle pattern took seven days to build, suggesting the target by end of week.
Economic Releases: Market manufacturing, BOE Bailey speech, Markit services, Market construction
Resistance: 1.4230/40, 1.4300; Support: 1.4240, 1.4190
JPY (109.60): We will admit that we completely missed the move in the yen last week. Where we were expecting the US dollar to fall further, it absolutely turned around and rallied, catching the market short dollars and driven by the rally in global stocks, made a high of 110.20 (previous weeks close: 108.86)!! When we are wrong it is better to “eat crow” and move on. We must take a step back and consider what is going on in Japan that would weaken the currency so abruptly, even as the overall dollar remains offered. There does seem to be an uptick in Covid cases in Japan, which leads to the 800 lb gorilla in the room – The Olympics! Scheduled from July 23-August 8th, will the athletes compete? We all know that the expense to hold an Olympic event is massive! If it does not happen, this will be a shock to that economy. The yen will weaken further, even as other currencies rally, and this makes predicting the yen’s next move difficult. It is headline driven. Advice: If a company needs to buy JPY, have several levels in mind, and layer in as those levels are seen. Do not wait until the absolute best rate is reached, to do 100%. Remember the old phrase in the commodity markets: “Bears make money, Bull’s make money, but Hogs get slaughtered”!
Economic Releases: Retail Sales (-4.5%), Industrial production (+15.4%), Construction orders, Foreign investments in Japanese stocks, Household spending,
Resistance:110.30, 111.00; Support:109.10, 108.50
CAD (1.2080): We have read more about the Canadian dollar in the last several days than any other currency. The theme of each article is “The CAD rally has extended too far”. We would agree. The strength of the Canadian dollar has been impressive and in a very straight line higher (lower USD). For those in the FX business for decades, this is not unusual. It is a commodity currency and commodities have rallied for the last year! But, markets are not that simple. We expect another leg down in USD/CAD before the market gets truly caught short and the squeeze higher (1.2300) begins. Canadian employment is released right after the U.S. data on Friday. This could be the catalyst to these moves. Like the yen, if the US dollar begins to fall toward 1.2000 or below, sell CAD and buy US dollars into the move. Do not wait for the lowest print, you will not buy US dollars there!
Economic Releases: Building permits, employment data
Resistance: 1.2120, 1.2175; Support: 1.2020, 1.1975
MXN (19.9000): It is becoming a “broken record”. The peso remains near the dollar support level of 19.70-80. But it is also trapped below the 20.20 level. This will be resolved…at some point. We favor the dollar weakening to 18.85. We will continue suggesting that companies that have peso expenses use FX forward contracts to hedge those expenses at the current levels.
Economic releases: No reports
Resistance: 20.30, 21.00; Support: 19.70, 19.25
CNY:(6.3700): The CNY continues to gain strength. Last night it traded below 6.3500! Ray Dalio, founder of the hedge fund, Bridgewater Associates, said that the yuan will become the world’s reserve currency. That is a big statement. He does tend to make these types of calls and half of them come true. We will monitor the CNY movements closely. Too many U.S. and European companies rely not only on Chinese manufacturing but also their cash for investments. As the currency gets stronger, all of that becomes more expensive. There are ways to offset the higher cost and that can be summed up simply by hedging those expenses with CNH (Chinese Currency in Hong Kong) with forward contracts. Please reach out to GreenShootsFX for information and pricing.
Economic Release: No reports
Resistance: 6.4000. 6.4500; Support: 6.3450, 6.3000