FX Weekly

FX Weekly Update – October 17th, 2022

Posted Under: Weekly updates

The currency market took a back seat to the equity market last week. Most currencies dealt in tight ranges against the dollar. The one currency that seems to be ‘on edge’ is the British pound. The Prime Minister did an about face on her ‘cut taxes’ announcement from two weeks earlier. They also have had the U.K. Finance minister, Kwasi Kwarteng resign. He has been replaced by Jeremy Hunt.

The CPI number in the U.S. was slightly higher but the initial sell-off in the currencies and equities quickly reversed and the equities jumped higher, while the dollar settled into a small range. Yields in the U.S. ended the week picking up a few basis points. The 10-year is right at 4% to begin this week. The G-7 met this past week to discuss, among other things, the strength of the dollar. Most central banks are raising rates, along with the FED, but the main country most concerned about their weakening currency is Japan. The yen (148.65) is getting close to crossing over the 150.00 level. The BOJ cannot raise rates, and even if they did, they would need more than a one-time adjustment to make a difference for the currency.

The calendar is light this week for U.S. data, but every other major economy has their inflation data and production numbers. These typically do not impact the currency market, but if an outsized inflation number is announced, that may create short term volatility for that currency pair.

EUR (0.9745): The euro has become a very range bound currency against the dollar. Even though the stress around the high energy prices and potential shortages heading into the winter months, the single-currency remained flat versus the previous week. There is trendline resistance on the hourly chart at 0.9925. Support comes in at 0.9550. The more interesting euro related activity is the EUR/GBP (0.8675). Last week the pair tried to move lower through 0.8600 but failed and has slightly recovered. The larger question is will this pair move outside of its long-term range of 0.9550 to 0.8200 established since the Brexit vote in 2016.

GBP (1.1235): Sterling fell from the recent high of 1.1450 after the finance minister, Kwasi Kwarteng, resigned. More political turbulence in the U.K. only puts more pressure on the BOE. Which has not only responsibility for managing their inflation issue but now they must worry about the massive losses that British pensions have experienced. The combination can have a negative impact on the GBP. Given the number of changes politically, the currency will come under more selling.

JPY (148.65): The BOJ is outwardly concerned about the weak yen. There is not much that they can do to reverse the weakness. Every other central bank is raising interest rates and will until inflation begins to fall. The last time USD/JPY was above 150.00 was in the early 1990’s. We can say that this is uncharted territory. Obvious resistance is at 150.00. The next level of interest is 160.00! Support at 145.00, 142.00 and 139.50.

CAD (1.3830): The oil market rallied above $90/bbl early in the week, but ended at $86/bbl. The rally and fall did move the Canadian dollar but not enough to get excited about getting long the CAD. The lack of follow through toward 1.3500 tells us that the impact from oil prices is less important than inflation. Therefore, it will be economic data and interest rate adjustments that determine the currencies future levels. Price action suggests that the Canadian will weaken and might even move to the 1.4670 area, which was dealt in March 2020.

MXN (20.0200): Describing this currency is like creating a masterpiece that ends up going nowhere. We will just indicate that resistance is at 20.2000 and 20.6000. Support comes in at 19.9000, 19.7500 and 19.4500.

CNY (7.2000): The weakness of the Chinese currency has been relentless. The future for the currency will depend on one person, their president, Xi Jinping, He is going to get elected for a historic 3rd term, which means he will be in that position for a long-time. The Chinese economy would not mind a weaker currency, it will cheapen their exports, which will increase productivity, etc. The long-term charts are pointing to 7.3000. The only way the CNY gains strength is if Xi wants that to happen. That does seem possible, but not in the short-term.