FX Weekly

FX Weekly Update – May 17th, 2021

Posted Under: Weekly updates

Last week’s theme was inflation. CPI and PPI were released in the U.S. and both surprised with the CPI printing 4.2% year over year (forecasts were 3.6%) and PPI beat forecasts (5.9%) with a 6.2% number. Equity markets fell for three days (nervous about the Middle East troubles) but turned around quickly and closed with positive gains by the week’s end. The interest rate picture has not changed in the U.S. where the 10-year yield closed at 1.62%. The US dollar did fall against GBP, MXP, EUR and most other European currencies. The dollar index is dealing near its recent low of 90.30 and we went back as far as 1985 and looked at the average for the dollar, on a closing basis, and found it is surprisingly 91.45.With all the issues from Covid, central banks across the world printing money and buying their own bond and the influence of technology, the dollar is a fraction lower than its 36-year average! Keep that in mind when you hear that the “dollar is weak or strong”. This week, the U.S. economic releases will be focused on housing where forecasts are for strong numbers, which we all have been hearing about for months. Low mortgage rates, violence in cities and shortage of inventory are all pushing demand and prices higher!

EUR (1.2135): The currency has held steady above 1.2100. The EU has made great progress with their COVID vaccines and they are opening back up. All eyes will be watching the ECB and looking for clues to when they may begin curtailing their bond buying programs. The EUR along with other European currencies, including Polish zloty, and Swiss franc have rallied. For the EUR, the next important level will be 1.2200 and it has dealt above there but that was in February, so resistance should be strong. Although we forecast 1.2500, getting there will take time!

Resistance: 1.2000, 1.2240; Support:  1.2100, 1.2060

GBP (1.4080): The U.K. is set to further open its economy this week. Restaurants are in scope for more diners and that has the pound holding onto its gains from the last two weeks. The high from last week was 1.4110 and that will be watched closely as a key indicator for the next leg higher. U.K. manufacturing numbers beat expectations which is supportive of the higher GBP. All eyes remain on the 1.4241 high from February 23rd of this year.

Resistance: 1.4110, 1.4166; Support: 1.4035, 1.4000

JPY 109.20): There is something interesting going on with the yen. Normally it has smallish ranges and reacts to (1) rise and fall of the U.S. 10 year, (2) safe haven buying, and (3) the carry trade. All of these have come into play in a single week! Employment data in the U.S. disappointed and the yields fell, the yen rallied. The Middle East issues brought more buying and it was all reversed after equity markets rallied into the weekend and the carry trade (selling yen and buying US dollars) and the yen fell to 109.51, before settling in at 109.20. We believe these large ranges reflect the nervousness of the global investor. The dollar’s failure to sustain its rally (above 109.50) gives us pause about further strength against the yen. 108.75 will be important trendline support and we would expect further volatility. Buy yen for the longer-term needs!

Resistance: 109.50, 110.00; Support: 108.75, 108.40

CAD (1.2100): Oil prices ended the week above $65.00/bbl. While the Middle East issues remain in the headlines and there doesn’t look to be any chance of a resolution any time soon, oil prices will remain “bid” and heading toward $70.00/bbl. This will keep the Canadian dollar heading toward 1.2000 and most likely, dealing near 1.1800. There has not been much of a US dollar bounce and if that happens (1.2200-1.2300) an opportunity to purchase CAD will be presented.

Resistance: 1.2200, 1.2275; Support: 1.2042, 1.2000

MXN (19.8500): Last week’s story around the peso was the Bank of Mexico’s announcement that it will keep its interest rates at 4%. The market was expecting a cut in rates, the peso had rallied to 19.78 on the announcement but quickly fell back to 20.00! Heading into this week, the same important levels remain in place. Support around 19.80/85 and resistance at 20.35. Inflation is a concern for the Mexican economy with corn prices at near record levels, oil prices rallying (both positive and negative for the consumer) and of course, the U.S. economy showing some signs of heating up. There is a view that current inflationary pressures are short-term, that demand will begin to level off and commodity prices will begin to fall. All this means is that the peso will most likely remain in a range with a bias toward gaining strength.

Resistance: 20.10, 20.35; Support: 19.80, 19.50

CNY (6.4300): The US dollar remains above the strong support level of 6.4000. There is interesting news to start the week where the Chinese government has said that steel manufacturing may need to slow down in China because it is heating up too quickly. Iron ore prices continue to rally and this is pushing prices of steel. Chinese steel does have a price advantage over U.S. steel, its $300/ton cheaper! We will keep an eye on this development.

Resistance: 6.45, 6.50; Support: 6.40, 6.25