FX Weekly

FX Weekly Update – November 9th, 2020

Posted Under: Weekly updates

The U.S. election seems to be over with Joe Biden set to become the 46th president. Most media and pollsters had predicted a “Blue Wave” but that fell short with Nancy Pelosi’s Democratic House losing several seats while the Senate maintains its Republican edge. This divided government has historically provided the best equity markets. The USD has fallen as expected, we have discussed the breakdown of the rising USD trend line during previous weeks and the dollar will most likely continue to weaken for some time. The FED did speak on Wednesday and continued to show their support for the economy. The 10-year yield fell 14 bps during the week.

EUR (1.1885): We called the low of 1.1600 before the election and this proved to be accurate. EUR rallied to 1.1900 before closing the week just below that. We have been discussing the impact of Covid in both Europe and in the U.S. This week, the pandemic has taken a back seat to the election and further EUR strength is forecasted. Goldman Sachs, along with several other firms have been looking for EUR to trade to 1.25 in Q2 of 2021. The most formidable level holding back EUR from this target is the 1.2000 area, which has turned away several earlier rallies.

GBP (1.3175): The U.K. closed-down a good portion of their economy over the last two weeks and GBP has rallied nicely. Just like EUR, the currency moved higher after the election. GBP remains in the middle of its recent range, 1.25-1.35. We do think that USD will weaken overall but GBP is going to be more sensitive to Brexit outcomes versus the current greenback weakness. The 1.3350 and then the important 1.35 level are the two hurdles for the next leg of the GBP rally.

CAD (1.3025): More than any other currency we were more impressed with the rally in CAD. Although the actual movement was similar to EUR and GBP the typical driver, oil prices, rallied but not to any new levels. Oil is dealing at $37.25 this evening and yet CAD is near a high (USD low). The most recent low for USD/CAD is 1.2950. The question is complex: has the currency market already anticipated a rally in the commodity markets? Should we expect oil to begin moving to $45/bbl., does that suggest that the global economy is going to begin to gain steam? Alternately, has CAD overdone its rally? Should we expect USD to rebound from this level? This is a very difficult call and will remain so until we see how the trade situation with China resolves itself along with how the fossil fuel argument moves in the U.S. With that said, USD support is at 1.2950 while the resistance level is 1.3300.

MXN (20.50): If you had a chance to follow our tweets last week, we sent out several notes with real time updates on the peso’s strength and its move through the very key USD support level of 20.80. This breakdown should continue, leaving USD vulnerable all the way to 19.50! U.S., Canadian and European companies that utilize the cheaper production in Mexico are most likely executing their hedges to lock in these seemingly better rates for their production. This movement is pushing the Peso higher. Expectations of a more friendly U.S. government toward Mexico and Central America are also weighing on the dollar.

CNY (6.6050): The most telling currency in this current U.S. election cycle is CNY (CNH). The expectation of a Biden administration, a much less critical one toward China, has benefited CNY greatly this past week. A bounce in USD should not be ruled out, potentially to 6.70 but the overall direction will target 6.45. Once we see that level, USD would be poised to test its all-time low against CNY. With a higher CNY there will be a big uptick in the cost of product moving out of China. We are going to suggest that this would coincide with the underpinnings of global inflation.