FX Weekly Update – October 12th, 2021
Posted Under: Weekly updates
The dollar continues to rise as the headwinds continue to get stronger! In the 4th quarter of 2020, we, along with most other financial firms, had a dire outlook for the dollar. Entering this week, the greenback is 5.5% higher that it was a year ago. Last Friday, the U.S. employment situation was released and the headline number of 194K non-farm payrolls was much less than the expected (500k). The rate fell to 4.8% and that is being touted as a win for the economy, along with the 0.6% increase in the month over month average hourly earnings.
First, the economy saw 183K workers either retire or get let go from their jobs. These employees are not eligible for unemployment insurance, so that negates the increase in job creation and pushes the rate lower. The increase in wages does provide a positive to paychecks, but it also signals more inflation. Oil prices are dealing at $81/bbl., that is the highest level since 2014! Corn, the soybean complex, wheat, and other agricultural products are at high levels and this week, harvest indications will determine their next move. Over 100 cargo ships are floating off the Southern California shoreline, waiting to unload. All these together signal inflation and transitory or not the risk continues to grow.
Yields on the U.S. 10-year are now above 1.60% although the high this spring was 1.75% and the increase in yield is supporting the dollar. The increase in inflation, will support it to a point. Goldman Sachs has just cut 4th quarter growth and there is uncertainty that may continue to support the dollar, but unless inflation moderates and job growth picks up steam, it is difficult to get comfortably long.
CPI and PPI along with advanced retail sales highlight the calendar this week. The combination of these can set the tone for the Fed’s tapering in November.
EUR (1.1550): Choppy trade has left the single-currency relatively flat against the dollar. 1.1590 has capped the currency while 1.1540 continues to support it. When this type of action is occurring, the most likely culprit is the euro cross-currency trades. EUR/GBP and EUR/JPY play a large part in this. EUR/GBP (0.8500) is pushing against short-term resistance, and if it succeeds, then either the euro will move higher or the pound will fall. EUR/JPY (131.00) the great predictor of global assets, is rallying on the back of yen selling. This may slow but if the equities continue to grow, then the next leg higher may result in euro buying.
Companies that are looking to purchase currency, pick your spots carefully. GreenShootsFX can assist with determining levels and if you would like, we can also open currency accounts in 35 different currencies!
GBP (1.3585): Two week ago the pound traded to 1.3400 and then bounce all last week to a high of 1.3673. We are beginning another volatile week for the pound. Already below 1.3600, the next level of support is 1.3550. The hourly charts suggest a move through this support and a test of 1.3530. What is going on in the U.K.? Boris Johnson seems to have been on the losing end of several debates and this can get the markets nervous. Add higher U.S. inflation and higher U.S. rates and it is easy to see why holding dollars versus gilts makes sense. Throw in the high natural gas prices hurting the British consumer and then the Northern Ireland, British and EU debate over trade. The latter is a much bigger deal than it seems. Failure to come together on this leads to other trade issues which of course means the U.K. will be looking outside the EU for trading relationships.
JPY (113.40): The yen selling has proven to be large and non-stop. After breaking resistance of 112.20 (now support), it has been relentless. We normally would be suggesting that this selling is really about the “carry trade” (selling or borrowing yen and deploying the funds around the globe) but there are other factors. China has said that Taiwan will want to become part of the mainland although Taiwan does not see it that way. North Korea continues to launch test missiles, some falling close to Japan. We would think that after this evening’s selling of yen, those that are long dollars may take profit, the yen can strengthen back to 112.50/80.
CAD (1.2485): Today’s 1.2445 low was certainly a reaction to the $81/bbl oil. That may be a headline for the Canadian dollar strength, but their September employment report, released last Friday, was impressive. The Canadian economy added 157,100 or three times the forecast. Their rate fell to 6.9%, an 18-month low and this report is supportive of a higher Canadian dollar. We have been thinking the Canadian would fall below 1.2000 and the combination of higher oil prices and a strong economy are good reasons. Buying the Loonie (spot and forward) to pay expenses is a great way to protect against higher payables over the next few quarters.
MXN (20.8500): USD strength, the U.S. Mexican border issue, Haitian migrants expected to make their way through Mexico to the U.S., inflation…any one of these would weaken the peso, but together, there is a strong argument for the peso to continue to weaken. Again, we have been wrong on this currency. Rather than falling toward 18.50, it is quickly making its way to 21.00. The March 7, 2021 high of 21.63 can be seen again. We would suggest buying pesos at this level and leaving orders above 21.00, all the way to 21.60 to buy pesos. This market movement will be choppy and leaving orders is a good way to capture and spikes higher in the dollar.
CNY (6.4550): Chinese speeches about Taiwan and their “merger”, along with the issues with Chinese real-estate firm Evergrande (Mondays WSJ has a lengthy article), and rising inflation along with their need to push products out of warehouse inventory is creating a longer-term dilemma for the Chinese. The lack of movement in the currency reflects the uncertainty. 6.5000 to 6.4000 is the range and will remain.