FX Weekly

FX Weekly Update – October 18th, 2021

Posted Under: Weekly updates

The dollar gave up ground last week, falling against all currencies except the Japanese yen (114.10). The three major economic releases last week, CPI, PPI, and retail sales, provided the market with inflation reports that were in line with expectations and a much better than expected retail sales number. The two major themes were oil prices climbing above $82/bbl., and the U.S. struggling to manage the coordination of moving product from cargo ships, to warehouses to truck and to store shelves. This is going to gather more focus, both politically and economically as shoppers begin focusing on the holidays.

The 10-year yield on U.S. treasuries settled the week t 1.57% (down from 1.60% the week before), and equity markets rallied strongly, the S&P ending only 1.3% from its historical high. This week, economic data is limited to the housing information in the U.S., but the Eurozone, U.K. and Canada will be releasing their CPI, PPI, and retail sales. These are especially important for each of their central banks (although the ECB is committed to keeping their rates low) in deciding their next rate decisions.

EUR (1.1600): The late week rally was more of a move higher being ‘dragged’ by GBP rather than  euro finding its legs. The hourly charts do point to a triangle with a target of 1.1660. We would not suggest this is a new rally for the single currency, with the dollar having another chance to rally and test the 1.1350 area. Support for the currency is 1.1580 and 1.1530.

GBP (1.3750): Strong rally last week to bring sterling to an important trend-line resistance area of 1.3800. The FT reported on Sunday, October 17th, that BOE governor, Andrew Bailey, spoke to a group of G30 central bankers about the rising inflation in the U.K. The futures market has increased the probability of a rate increase to 0.25% in December and this supports the rally in the currency and may also provide more support if there is, in fact, a rate hike before year-end. The BOE could be the first major economy to raise rates and that would put the pound well into the 1.40’s. Resistance is 1.3800 and 1.3900, while support is 1.3680 and 1.3600.

JPY (114.10): The weakness in the yen is underpinned by the global rally in equity markets. We have mentioned this several times in the past with the carry trade (selling or borrowing yen), which takes low interest yen sales and deploys it to higher yielding assets. We also must be concerned about North Korea’s increased testing of missiles, several falling near Japan. China continues to be aggressive in their stance toward Taiwan. Let us not forget that Japan has recently elected a new prime minister, Fumio Kishida on October 4th. He replaces Yoshihide Suga, who resigned after one year in office. Major resistance is at 114.55, which was the high in October 2018.

CAD (1.2365): The Canadian dollar has gained momentum this past week, gaining on the oil rally, up 3.8% since September 20. The low print of 1.2002 (May 3, 2021) is within reach. We would expect the U.S. dollar may recover toward 1.2500, but the overall trend in the greenback is lower. More financial firms are now calling for oil prices to rise to $100/bbl.! U.S. energy secretary, Jennifer Granholm, has said she is considering tapping into the strategic energy reserve to add supply and bring down prices. This would be a short-term solution to a long-term problem.

MXN (20.3500): The dollar opened last week at 20.8600 and ended at 20.3500! We have not discussed the economic growth in Mexico, but it is impressive. 2021 is expected to increase by 5% and in 2022, 3.2%. Oil prices do matter, and although they are not as important to the overall economy as it was ten years ago, they are still supportive. With the current level of $82/bbl., the impact is positive and helpful, along with the high interest rates, to push the peso back to its first support level of 20.2000 and then 19.9500. We will always suggest that buying pesos in the forward market is a smart way to manage local peso expenses.

CNY (6.4300): Back down near the key 6.3500-6.4000 area. Not much to report. Overall dollar weakness last week pushed CNY higher. Focus is NOT on the currency. 6.3500/6.4000-6.5000 is the range until there are more developments.