FX Weekly

FX Weekly Update – May 23rd, 2022

Posted Under: Weekly updates

Last week proved to be difficult for many asset classes. Equities were under pressure, U.S. treasuries were purchased, pushing yields lower and the dollar weakened on profit taking. This week has a calendar with data ranging from home sales, PCE, GDP and durable goods. Each one of these are important on their own, but all together in a single week can give the dollar another boost! GDP is supposed to print a –1.3%, following last months –1.4%. Home sales, inventories, etc. are already slowing as higher mortgage rates, lower 401K values and exorbitant home prices are beginning to turn buyers away. One note on equities, each index, the S&P, Dow Jones and Nasdaq have entered bear territory. Our only thought on this development is that since the crash of 1987, all the talking heads on Wall Street say, “buy the dip” or “add to your positions”. Both have worked incredibly well, but we must say that each sell-off is different and this one has more factors to consider.

The USD may be building for another long-term rally. Interest rates will continue to move higher as the Fed becomes more concerned about inflation. Global flight to safety, high oil prices. Again! Grain production will be much less because of Ukraine war, pushing prices higher for not only wheat but also beef and pork.

EUR (1.0560): When we sent our note out last week, we were looking for a bounce in the euro, potentially to 1.0600. That level was nearly achieved and for the moment is holding as a resistance level. We are looking for another attempt for the single-currency to rally. Last week the ECB announced that a 0.25% hike in July will be their first in a series of hikes. Most central bank watchers believe the ECB is behind in its rate increases, but those same analysts think the Fed is too.

Watch 1.0600 and 1.0650 has levels of resistance. We believe that the least path of resistance for the euro’s next move is lower. Support at 1.0335, 1.0250.

GBP (1.2540): The sterling pound has been building a base over the last few trading sessions. We would expect that this can push the pound toward 1.2800. Those that are looking to sell sterling should consider that level a terrific opportunity to sell. The BOE and the British economic data this week will be watched carefully. Home sales will be a key indicator for the BOE and although the BOE was an early adopter of tightening rates in this environment, they have become concerned about a slowdown. The GBP will be trading off any indication of their next rate adjustment.

CAD (1.2800): Another week of sideways trade for the Canadian dollar. Oil prices resumed its rally, which did put some pressure on USD/CAD. The inflation numbers, though, continue to keep the BoC and the Fed moving their interest rates higher. The result? For the moment, the market is favoring the US dollar, believing the Fed will move rates higher and faster than the BoC and geopolitical concerns favor the dollar. We would suggest trading the 1.3000-1.2680 range.

JPY (127.35): The yen spent last week getting stronger as US treasury yields fell, and JPY crosses were sold off, following the falling equity markets. Yen will be most sensitive in these coming weeks to equity markets. The carry trade (sell Yen, buy higher yielding currencies) may begin to get unwound, and that will create a major move in USD/JPY. 125.00 and then 122.00 are the near-term support levels. We are widening these levels because we believe that this volatility in the equities will begin to push other assets to become more volatile as well.

MXN (19.8000): Two weeks ago Banxico increased Mexican interest rates by 0.5% to 7%. This move helped stabilize the peso against the rising dollar. Last week, when the US dollar did weaken, it provided the perfect relief for the peso. USD/MXN is now back at a year’s long support area, namely 19.7000. That is going to be key to further Peso strength. This week, we will call a range of 19.70 – 20.45.

CNY (6.7000): The CNY is beginning to trade like a currency that is not controlled by a central bank. Last week, USD/CNY rallied to the 6.8400 resistance level and is now dealing at 6.7000. More news about even tighter covid close downs in Shanghai. There are many more shutdowns near the port cities, which does make sense. But this is also slowing down the logistics of moving product to the U.S. and other major countries. We do believe that 6.8400 will be tested as least once more. Above that level, it is 7.0000 and then 7.1600.