FX Weekly Update – March 8th, 2021
Posted Under: Weekly updates
The countdown is on! Nine days until St. Patrick’s Day. The question: Will you go to the largest U.S. party in Savannah, Georgia? Why do we lead with this statement? Well, the town reportedly celebrates the most vibrantly and this segues into the debate in Ireland that is creating anxiety in the market that will impact the EUR. Northern Ireland and, therefore, the UK are facing off against the EU. It’s all about the transport of product from mainland UK to Northern Ireland. Obviously, the Republic of Ireland is siding with the EU. The “Troubles” began in1969 and some say it remains today. There is fear that violence will again emerge. Couple that with an absolute disaster of the covid vaccine roll-out* in the EU and there are good reasons why the EUR is dealing at 1.1900.
Let’s look at the interest rate scenario. First, Goldman Sachs has revised their 2021 year-end forecast for the U.S. 10-year yield from 1.50 (1.58% today) to 1.90%! They have also forecast the 10-year German Bund to 0.00%! Fed Chairman Powell continues to follow the “low for long” and that has fueled the equity markets. Friday saw a gain of 1.95% after Thursday’s similar drop. Friday’s employment report in the U.S. was strong. Non-Farm payroll was higher by 379K jobs and the unemployment rate fell to 6.2%. Great news but we have to add that there are still 10MM workers unemployed. The weekend news: Senate passed the $1.9Tn spending bill for Covid relief. President Biden should have it on his desk sometime this week. 9% of the bill is focused on Covid, the balance on bailing out poorly run states. The majority of the cash will be dispensed between 2024 and 2028. We suggest that this is another inflationary arrow shot at the U.S. economy
USD rallied sharply on Friday. Several things to consider; Firstly, long term yields are rising and with the added stimulus will most likely continue. Secondly, employment numbers were great and will hopefully continue that trend and lastly, the USD has been beaten down for some time, so a reversal or a “shaking out” of weak USD longs was warranted!
EUR (1.1900): Our comments above provide a backdrop to the EUR sell-off. It has been lagging other currencies in this last rally (i.e. Sterling has out shined to the upside). The demand for U.S. assets, the EU’s failure to move the vaccine program forward and of course interest rates favoring the dollar have all contributed to the EUR weakness. Support this week: 1.1850 and 1.2800, resistance for the EUR is at 1.1950 and a.2050.
Client’s that are looking to purchase euro for payments are getting the opportunity.
Consider your margins and where the currency is. If they line up, it’s time to buy!
Bears make money and Bulls make money, but Hogs get slaughtered!
GBP: (1.3820): The bright spot in the UK? The vaccines are getting into arms at a great pace! Downside? UK growth is a concern and like we mentioned above, there is a real issue with Northern Ireland. We must keep an eye on those developments. When a weak economy is recovering it cannot be sidetracked by potential embargos or violence. GBP remains in its “uptrend” even though it fell sharply at the end of last week. It does remain strong against the EUR and JPY. 1.3750/1.3800 is an important support level for the currency. It has fallen 2.25% from its high. This week will be pivotal. Like the euro, these levels provide a relief to the GBP buyer.
CAD (1.2635): Unlike most currencies, the CAD has held its own against the USD last week. Why? Oil! Russia and OPEC agreed to maintain their low output signaling higher oil prices in the future. The employment situation in the U.S. also was a positive for the currency. Canada’s largest buyer of its oil is the U.S. Demand from the recovering U.S. economy should be very helpful to the Canadian economy. We maintain that the Loonie (Canadian dollar) will remain strong and ultimately move toward 1.2000.
JPY (108.00): The USD has rallied straight up from 105.00 on February 19 to last Friday’s high print of 108.64. The demand to sell yen and deploy the resulting USDs around the globe has been incredible. Our warning? The large move in USD/JPY in a short period of time and the Japanese Candlestick chart (we will admit that we are not experts on the technique) pattern, namely the “Hammer” (new high followed by a close near the low of the day) make us believe that we may have put in a high for the dollar and should see further sell-off into the week. Possibly a fall to 106.75/107.00. For yen buyers the early part of the week should be the time to secure the currency either with a spot trade, parking those funds in a GreenShootsFX digital account or with forward contracts.
MXN (21.30): Last week, in our update, we suggested that 21.25 would be seen early in the week, potentially 22.00. The high was 21.42 and there does not seem to be much “backing off” from that level as we begin this week’s trading. There is no question that USD short positions were “squeezed” last week. The strength of US interest rates as well as the strength of the US equity markets helped the USD. There is much to develop in Mexico, from the outcome of their relationship with the U.S. politically, to a potential nationwide legalization of marijuana combined with the central bank in Mexico cutting its interest rates! Uncertainty leads to lower asset value and this is the case with the peso. U.S. and European based companies that have maquilas should welcome this weaker currency and be purchasing pesos to match their payroll expenses! Please reach out to GreenShootsFX for details on how a hedging program to manage Mexican expenses can benefit your margins and save cash!
CNY (6.5090): GreenShootsFX has called the range in this currency to be 6.40 -6.50. Last week the short USD positions were squeezed and the USD rallied to 6.5286! Do we believe there is a wholesale change in the trend? No! But caution should be taken as there can be another push to look for stop loss orders near 6.55. Like most currencies that have weakened against the USD, look at this as an opportunity to purchase the weak currency to pay your Chinese vendors. The number of clients that have come to us in the last two weeks and asked about a way to pay in CNY (CNH is the fully tradable and convertible currency to do just that) in hopes of defending against higher manufacturing costs has increased dramatically! This is a great time to review your costs from Chinese vendors, whether in USDs or in CNY. There are potential cost savings. There is no question that the Chinese have been holding their costs steady so they do not lose business but there will be a point when those costs will be passed on to their customers. Paying in CNY and hedging those is the most practical way to avoid the shock of a cost increase. GreenShootsFX is well positioned to assist in this process!
*Please check out a more thorough discussion around the Northern Irish “Troubles” and the EU vaccine issues that will be published on our site.