FX Weekly

FX Weekly Update – May 16th, 2022

Posted Under: Weekly updates

The dollar continued its strong performance last week. Equity markets are in turmoil, with large rallies and sell offs. Friday did shake off the week’s bearish sentiment, staging a large rally. The yield on the 10-year had begun last week at near 3.09% and ended it at 2.92%. Cash flowed into the U.S. dollar and U.S. treasuries as the flight to safety dominated the market. CPI and PPI were both higher than forecasted. Inflation continues to be the markets focus, and we are seeing that reflected in the dollar’s strength. One of the main concerns for international companies is the miss in their foreign sales because of the rising dollar. Foreign currency denominated sales will look weaker, especially if not hedged. On the other hand, U.S. companies that are importing product should see a pick-up in profitably as the strong dollar decreases the cost of goods sold. It is always important to not get pulled into the “strong dollar” bad scenario, there are always two sides when it comes to foreign currencies.

The coming week has a calendar with manufacturing data, which we believe will become more important in the next leg of this dollar rally. The economy has gone from full covid recovery to inflation driven interest rate hikes and now the resulting output by U.S. manufacturing companies.

EUR (1.0400): The euro has been under pressure since falling below 1.1000. Now, after reaching a low of 1.0349, the profit takers may push it to 1.0500 this week. That level would be a suitable place to begin selling euro and add to any short hedge positions. Last week the ECB did say it is considering adjusting their rates higher, but they are behind the curve. The Fed will raise another 50 bps on June 15th and we cannot forget that the Fed can increase rates between meetings. This will keep the single-currency under pressure. Buying euro at these current levels and below will always be a terrific way to manage the expenses.

GBP (1.2260): Much of the market has forgotten about the sterling, with more focus on the euro. But the pound has fallen quickly, back to levels from June of 2020. The next support area is 1.2050 (May 2020 low). We believe that once a currency falls (or rallies) so quickly, the profit takers should move it back to a level that stretches the short positions. 1.2500 would be the area to sell the pound. The risk below 1.2000 opens the March low of 1.1409!

JPY (129.50): The yen continues to feel the brunt of the dollar strength. The spread between the interest rates (U.S. 10-year –10-year JGB’s) continues to widen in favor if the U.S. No reason to think that the USD is under any risk of falling against the yen unless the equity markets begin unraveling. That would mean the EUR/JPY and USD/JPY, representing the carry trade, would unwind and force yen higher. Without that happening, we expect the yen to continue to weaken and the dollar test the previous high of 131.35.

CAD (1.2900): We must admit that our view of rising oil prices would support the Canadian dollar to levels around 1.1700 didn’t materialize. We missed this USD/CAD rally. The overall dollar strength has overtaken the high oil price so now we must take another look. Are oil prices high? Yes, no question that the $110/bbl price of crude should support the Canadian dollar. Canadian interest rates will rise along with the U.S. But, the need for safety is reflected in the current Canadian rate. Support for the USD is right at the 1.2900 area (where it currently deals), with trendline support right below at 1.2800 and then 1.2500. Resistance is at 1.3035, and then 1.3300.

MXN (20.1000): The central bank of Mexico adjusted their interest rates higher last week. Now at 7%, the peso has gained some strength against the USD. The 19.7000 level is major support for the dollar. Below that it is 19.5000. Resistance is 20.5000, then 21.00. The peso has not been in focus over the last several months and that keeps us excited about the next move. The market is adjusting the peso and will continue to do so with basic economics.

CNY (6.7950): The CNY’s weakness is driven by the covid lockdowns in China, followed by the higher U.S interest rates. Now testing the key resistance of 6.8500. The PBOC is completely fine with the CNH weakness. It supports their exporters, and releases pressure on the Chinese economy. The next real level above 6.8500 is 7.2000!