FX Weekly

FX Weekly Update – October 11th, 2022

Posted Under: Weekly updates

Last week proved that no equity market rally, no sell off in the dollar or rally in bond prices, is immune from the U.S. employment situation. Friday’s job report was a solid one. The non-farm jobs number was +263k, while the rate fell to 3.5%. Nearly in line with forecasts, but still too strong for the Fed watchers. Equites fell sharply, the dollar rallied and U.S. yields moved quickly higher (bond prices lower). This week, we are again faced with two inflation indicators. Wednesday is PPI and Thursday, the CPI. In both cases the market forecasts are looking for a lower YOY number. Because these numbers are based on last month, the energy component supports lower results. Those are followed by retail sales on Friday.

The market is laser focused on the Fed. The employment report did not provide the weakness that would be a signal the Fed could slow down on rate hikes. For the PPI / CPI to change the Fed’s mind, they must both fall by greater than last month. If this does not happen, dollar bulls will get renewed energy and currencies will continue to weaken. The importers that need to pay those invoices should be very happy in this environment. Low currencies results in significant savings (unless importers are paying vendors in dollars). This can be a good time to consider hedging future payables. A 50% coverage of those invoices with a forward contract would take risk off the table and begin building a budget rate for next year!

EUR (0.9700): Another week of dollar selling, euro buying until Friday. Once the jobs data in the U.S. was released the dollar jumped, leaving the single-currency vulnerable. The September 28th low of 0.9535 may be tested this week. When looking at the key resistance area for the euro, it is 1.0000. This has held through the last attempt by the currency to rally. We still believe that a 0.9000 euro will be the objective of this falling currency.

GBP (1.1050):The increase in volatility with the sterling has made it the center of attention in the FX world. The new prime minister, Liz Truss, has caused the currency to fall to 1.0350 and then rally to nearly 1.1500! We begin this week, near the middle of that range. The fall to 1.0350 and powerful rally does keep us on the sideline. Buying the GBP here will help with the long-term average of purchases but that low will be tested again. Certain occurrences in the FX market tend to repeat themselves and a sudden fall and rally is one of those. Testing the low over the next several weeks should not be a surprise.

JPY (145.50): The large range that USD/JPY has traded over the last several weeks has consolidated around 145.00. Between this level and 148.00, we expect the pair to struggle. The BOJ’s intervention near 150.00 is fresh in traders’ minds. They will buy dollars and sell yen with caution. Buying yen, on the other hand, is great timing. Using these levels to hedge future payables, royalties, earning, etc. will save cash and enhance margins.

CAD (1.3830): This currency pair remains caught between the volatile oil prices and the increase in both the BoC and the Fed’s rate hikes. Oil is back above $90, and with OPEC announcing the removal of 2mm barrels a day from their supply, there is no reason to see oil back to $100/bbl. That is great for the Canadian dollar, but with the Fed raising rates and their overall higher and higher comments, the CAD is losing the battle. 1.4000 is resistance and 1.3600 support.

MXN (20.0000): Another week with no progress either way and no new Mexican economic data to study. The US dollar remains very steady to even losing against the peso. This has us leaning toward a lower USD/MXN over time. The huge support between 19.5000/19.7500 will keep this from happening any time soon. While 20.20, 20.50 and 21.00 will be difficult for the dollar to rally through.

CNY (7.1800): The CNY is falling quickly this week. Already moving from 7.15 to the current level. The 7.1900 / 7.2000 area will be difficult to find though, but the high of 7.26 in August will be the most difficult. The lower support area is more difficult to outline. 7.10/7.12 will be the most important and then possibly 7.05.