FX Weekly

FX Weekly Update – November 22nd, 2021

Posted Under: Weekly updates

Strong economic data, coupled with new Covid shutdowns in Austria and potentially Germany, along with a dovish ECB, pushed the dollar higher for another week. U.S. retail sales were stronger than expected, pushing the 10-year to a weekly high of 1.647% before backing off to end the week at 1.559%! The fear of a more widespread shutdown in Europe forced late week safe haven- purchasing of U.S. treasuries.  Oil prices fell, along with gold and Bitcoin. Oil remains volatile as the struggle between increasing demand in the U.S. and China, while Europe looks to be slowing.

The Fed has another big week ahead; will Biden keep Jerome Powell at the helm or replace him with Lael Brainard. The decision is expected early this week. Two Fed chairs have also suggested that the Fed should increase their monthly tapering from the current $15B to $30B! Vice Chair Clarida and Fed governor Waller both expressed their concerns with growth and inflation.

This week has several important data releases other than the Fed Chair announcement. New home sales, purchasing managers, durable goods and consumer spending highlight the shortened holiday week. Consumer spending is expected to show the highest jump in one month, since the early ‘90’s! This should be another strong week for the dollar!

EUR (1.1272): The euro has been hanging on for several weeks, but the combination of Austria’s wholesale shutdown and potentially Germany’s, along with the ECB’s dovish announcement on tapering and rates, pushed the euro to a low of 1.1250, before short covering pushed it back above 1.1300. We begin this week, under 1.1300 and most likely we will watch the currency drift lower, with 1.1000 in sight. Bounces should find resistance at the 1.1375 level and then again at 1.1425. Support will slow down the euro near 1.1250 and 1.1175.

GBP (1.3445): Unlike the euro the sterling has been more supported even as it does trade lower against the dollar. The EUR/GBP relationship is moving against the euro and thus more supportive of the pound. The hope for the BoE to raise interest rates, as soon as Q1’22, while the ECB continues to struggle with the pandemic, is the anchor on the euro. Looking at the daily chart below, the pound is falling within a channel, and is now sitting at a level where it had spiked higher and failed, twice, in the last couple of years. We are going to be cautious with turning too bearish for the pound. The channel formation does paint a picture of a slowly falling currency followed by a quick jump higher! Buying pounds at this level all the way toward 1.3200 may prove to be the correct position.

JPY (114.05): Inflation does not seem to be an issue for Japan which is the headline in the WSJ this past weekend. If that is true, then there should not be any concern about the BOJ raising interest rates. Couple that with the U.S. potentially increasing their tapering and raising rates, the USD/JPY should continue its march higher toward 116.00 and there’s no reason to believe the dollar will fall in any meaningful way. Support is at 113. 50 and then again at 112.90. We are targeting 116.00 and believe that laddering in buys, above 114.70, is the best way to take advantage of this rally.

CAD (1.2650): It’s about oil and there is certainly some interesting developments. The IEA stated that the non-OPEC+ countries, that had been struggling to get their production back online after Covid, are now back to production. There should be another 1.5MM barrels / day hitting the market, and that can grow to 1.9MM. The Canadian dollar has fallen to the current level and may continue toward 1.2800. Here is where it gets tricky; China, the U.S., and many other developed countries are growing at a strong pace yet Europe is holding back global growth. When (if) they can begin moving forward, then demand for oil will increase, prices will move higher, and the Canadian dollar will strengthen. Use these levels to purchase the loonie.

MXN (20.8500): The peso has matched its lowest levels from October 10th and 31st. Last week we discussed the peso continuing to weaken back to 21.50-60. Like Canada, the value of oil impacts the Mexican economy although not to the same extent but it certainly hurts the government’s revenue. Weaker oil prices will lead to a weaker peso! Begin buying pesos above 21.20, again, layering in and then rolling the purchases into forwards that match your cash flows.

CNY (6.3920): Nothing much to report with CNY. The currency has held steady against the dollar since falling below 6.4000. There is more information about the rapid growth in China where exports have jumped (makes sense) and the domestic demand is bouncing back as well. Current interest rates are at 3.85% and Monday could lead to a rate change. The currency is not moving either way!