FX Weekly Update – November 8th, 2021
Posted Under: Weekly updates
A very good week for the U.S. economy during which the Fed did announce the beginning of tapering. $15B per month, with November and December a lock, and then they will monitor data and either continue or slow down. The employment report on Friday was very strong adding 531,000, which is more than expected. The rate fell 0.2 points to 4.6%. Public sector jobs fell, while private payrolls increased! Equity markets in the U.S. rallied strongly, finishing the week at record levels. Treasuries rallied as well, especially at the end of the week, pushing the yields lower across the board. The 10-year ended at 1.45%. With all this positive news, it should not be surprising that the U.S. dollar firmed as the week came to a close.
While the week was a positive one for the markets, there is one development that we should spend some time on. Although the inflation story remains front and center, the yields did fall, even though the expectation of rate hikes by the Fed (and other central banks) remain. The concern is the “flattening” of the rate curve. What does this mean? Longer-term rates have fallen while the short end has fallen or held steady. Flattening of the curve and even more concerning, an inverted curve, signal recession. Once the Fed does raise rates (Q4’22), how many times will they? If 10’s and 30’s remain steady, and short-term rates move higher, a recession is in scope.
EUR (1.1570): The euro remained steady near 1.1600 most of last week until Thursday/Friday when it printed a low of 1.1512. We will say the rally back to the current level is surprising where we believe the single currency is going to be weaker next month, than it is today. We were thinking 1.1450 as a level to buy euro but now that level looks like it will be more close to 1.1300. ScotiaBank is predicting 1.1000, which again, is not that far from where the currency is today. The issue for the euro, is the ECB’s reluctance to discuss higher rates, while most other countries are preparing to raise rates. Resistance for the euro is 1.1600, and then again 1.1665, and support is at 1.1500, and then 1.1450.
GBP (1.3500): Last week proved to be a difficult one for the sterling. The BoE had their meeting last week and the markets were assuming they were going to raise rates or provide some guidance as to when they would hike them. There was no rate hike and no guidance. The pound fell from 1.3694 to 1.3423! That is a large move in an environment that does not have much volatility. The September 28th low of 1.3410 did hold, but that may be a short-term support area. Further weakness to 1.3280/1.3300. GBP buyers should be looking to pick-up pounds this week. The GreenShootsFX currency account is a great way to “park” these and accumulating the currency for future payments can provide a “sterling cost averaging” effect.
JPY (113.40): Quiet week with USD/JPY moves sideways after the recent run-up. This consolidation and test of support at 113.25 is good sign for the next leg-up for the dollar. We would say that 113.25 and then 112.75 are levels that should hold the dollar from falling further. The target for the currency pair is 116.00, and that is a great level to be purchasing yen, in fact, anything over 114.50 would be great. The only concern is the fall in the yield of the U.S. 10 year which is highly correlated to USD/JPY and further weakness in the yield may push the dollar lower.
CAD (1.2460): Canadian employment, released on Friday, was a mix of news. The rate did fall to 6.7% (from 6.9%) but jobs created came in a bit short of expectations. Oil prices traded under $80/bbl, as the world waited on the OPEC+ meeting, hoping they may decide to increase supply. They did not, and oil rallied back to close the week at $81.17. Not enough to support the Canadian dollar, which fell against the U.S. Dollar. The current level does sit on a key resistance area. Above 1.2460, the 1.2525 level is another resistance level. The Canadian, given its correlation to commodities, will most likely spend time consolidating, without much direction. Canadian expenses can be managed by using this time to accumulate the currency, again, forward contracts or a GreenShootsFX currency account!
MXN (20.3500): Technically, the peso is in what we would call, “No Person Land”. The recent high at 20.85 and the low of 20.12, doesn’t provide a near-term signal for the next move! We will leave you with this: because there were two highs at near 20.85, and the low at 20.12 (between those highs) can lead one to believe there is a double top and a close below 20.12, should signal a further fall in the dollar toward 19.50. But, if the dollar rallies again and closes above 20.85, then you could call the recent activity a sideways triangle and a target of 21.50. So, what does that mean? Essentially no new direction can be determined until either a fall below 20.12 or a rally above 20.85. Buy pesos for expenses, use the forward market and nail down the USD value of those expenses.
CNY (6.3900): Small range (150 pips) last week. 6.4050-6.3900. The concern has been been the real-estate issues in China, but those seem to have worked themselves out. One of the U.S. military generals said that the concern about China and Taiwan becoming one, is about two years away so nothing to see here. Although the dollar in general should rally into the end of the year we are not sure that USD/CNY will be as impacted as much as other currencies. The economies are becoming further disconnected. China is building more and better relationships with Eastern European and Middle Eastern counties. Dependency on the U.S. consumer may be fading.