FX Weekly Update – March 1st, 2020
Posted Under: Weekly updates
Roller coaster week for USD, especially against EUR, GBP, and CAD. This is the classic reversal week for those three currencies in particular. When a currency (or other asset) has been trending, there can be an abrupt change in that trend. This is usually a big push in the trend direction, either making a new high or low and then spending the day or week reversing that last move. That is exactly what happened last week. By Friday afternoon, each of those currencies fell after printing new highs against the USD.
Why: U.S. treasury yields continued to rally last week, with the 10-year settling in at 1.40% (high of 1.55%) and important for the USD, the 2 year closed the week at 0.12% (high 0.182%). The quick move higher in yields and falling equities put the USD haven status back in play. It is also safe to say that EUR, GBP and CAD had moved in a nearly straight line higher for several days (weeks in the case of GBP) so the snap back is not a surprise.
EUR (1.2070): The euro continues to trade without much energy, falling into the week’s end after touching a high of 1.2243. Behind the move was a fall in GBP which was more dramatic. EUR has structural issues; A new Italian government, led by Draghi, will need time and very strong leadership to change the tide. Military assets are being deployed to northern Europe because of the concern over a Russian movement of its military. Oil prices are rising, that increases the chance of inflation in the EU. Keep in mind that Russia is the main supplier of oil.
The market will focus on the support level at 1.2000 and then 1.1950. Resistance is last week’s high of 1.2243 and 1.2305.
Eurozone’s economic releases: German Manufacturing, eurozone PMI & GDP, German CPI, German Retail Sales, German unemployment rate.
GBP (1.3920): The pound begins the week over 300 pips lower than last week’s high print of 1.4242! For GreenShootsFX clients that felt they had missed the opportunity to purchase GBP below 1.4000, this week may offer the opportunity. We project the currency will fall an additional 100 pips from the 1.3920 level. Once we see the low-1.38 level, we will reassess. There will be some anxiety around those long GBP positions agains USD and other currencies, which will likely hit stop-loss orders and add to its weakness. Support at 1.3900 (last week’s low) as well as 1.3820. Resistance at 1.3890 and 1.4075.
UK’s economic releases: Manufacturing and Construction PMI.
CAD (1.2725): A major reversal in the Canadian dollar late last week took back all its gains in the previous two weeks! The low of 1.2464 was the lowest since April 2018. Oil had hit a high print of $63.80/bbl and ended the week at $61.60! CAD begins this week at 1.2725 which is a real blow to the “short USD/CAD” positions. The currency pair does remain below a long-term trend-line but the line is steep and may be vulnerable. The interest rate difference between CAD and USD has widened in the U.S.’s direction which has really changed the story behind the pair. This story is unfolding and it will be a tug-of-war! Resistance at 1.2800 and 1.2870, support is the low of 1.2464 and 1.2200.
Canada’s economic releases: RBC Manufacturing PMI, GDP, Building Permits and Trade Balance
JPY (106.50): USD gained strength against the yen because yields have turned even more in favor of the greenback. This factor has always been the underpinning of the relationship and once there is a large move in the U.S. yields it takes precedent over all other factors. This week we should see a further dollar strength, especially if the U.S. 10-year yields continue to rally. 107.00 is a target for the USD rally against the yen but more importantly, the 110.00 and 112.00 levels. That kind of move also suggests that equities will reverse their recent decline and have a powerful rally. Right now, that doesn’t seem plausible but the rally in U.S. yields didn’t seem plausible a week ago!
Japan’s economic releases: Unemployment, Capital Spending.
MXN (20.85): Mexican interest rates are falling, and USD rates are rising, together that means the favor is toward the USD. Although there was not much movement in the peso last week, it does seem to me setting up for another bout of weakness against the dollar. We expect 21.25 to be reached early in the week and then a chance for 22.00. We have spent some time discussing the rate differences but just as important are the politics in Mexico which are, we dare say, even more silly than in the U.S. There is a push to legalize marijuana and we have no idea what that really means. Does it increase the violence along the U.S./ Mexico border? Will it cause the maquila’s to close (maquila’s are manufacturing facilities that produce product for the U.S.), will it cause the roads into the U.S. to become more dangerous for the product to move? These factors are weighing on the peso and will cause long-term damage to what has been a very important source of income to Mexico and lower manufacturing costs for the U.S.
Mexico’s economic releases: No Releases
CNY (6.48): Another trading week where CNY has weakened against the USD. Several weeks ago, GreenShootsFX said that the range was going to be 6.40-6.50. The currency pair has remained within that range and may push above 6.50 this week. There are some rumblings about the trade war between the U.S. and China heating up once again. Some D.C. insiders are pushing to keep the previous tariffs in place. China continues to establish its law in Hong Kong and longer-term issues prevail. The support for USD is 6.42, that is where the long-term trend-line comes in this week.
China’s economic releases: No releases