FX Weekly

FX Weekly Update – October 24th, 2022

Posted Under: Weekly updates

Quite a week has passed what with Liz Truss, the U.K.Prime Minister, resigning after 44 days setting a record for the least amount of time in office. The Bank of Japan and Ministry of Finance sold USDs and bought yen, U.S. equity markets staged a huge rally and the U.S. dollar ended slightly weaker! The shocking resignation by Truss did support the dollar against the GBP, but the currency recovered. The yen had printed a 151.93 early Friday morning before the BoJ came into the market, sold dollars and pushed it lower against JPY. The low for the USD/JPY was 146.15 and within four hours rallied 3.8%!

The equity rally, and the slightly weaker dollar were a response to Fed governor Christopher Waller confirming a 75 bp rate hike in November, but then he suggested that the Fed begin to adjust rates by 25 bps. The market has been expecting 125 bps worth of rate hikes by the end of the year! The dollar has not given much ground back, although some will argue it has. This week the ECB is set to raise rates, and that is expected to be 75 bps. Unless there is a larger hike or more hawkish language from the ECB, the Euro should remain steady,

EURO (0.9850): The ECB will announce their rate adjustment on Thursday and that is expected to be a 75 bp hike. The single0currency has rallied from 0.9700 to the current level after the BoJ sold dollars and the Fed’s Waller discussed future rate hikes. The hourly charts show that the euro has moved above a trendline that began in early September. 0.9900 and 1.0000 are major resistance levels. A close above 1.000 will set up the euro to move toward 1.0250.

GBP (1.1280): The sterling has been knocked around since its collapse to 1.0350. It has bounced 9% since that low! It is difficult to believe that all the political turmoil is good for the pound but there is always the “sell the rumor, buy the fact” trade, which makes us cautious to get too bearish with the GBP at this moment. There are several resistance levels that can keep GBP from rallying too far.  The first level is 1.1500, then 1.1735. The pound will continue bouncing around as rumors and “talking heads” add confusion to the market. Support at the 1.0900 should contain any selling pressure.

JPY (147.50): The BOJ sold dollars on Friday, pushing the yen higher against most major currencies. This is the second time in the last several weeks that they have intervened to slow down the fall in their currency. The intervention was successful when you consider the timing (Friday) and how stretched the yen shorts were. We have discussed currency intervention before. The single central bank intervention in a major currency does not have long-lasting results. In 1998, every major central bank intervened on behalf of the BOJ. USD/JPY was sold for an entire 24 hours, pushing the dollar down about 28 ‘big’ figures (138.00 to 110.00). The current intervention may be effective in the short-term, but until the interest rate difference between the U.S. and Japan shrinks, the dollar will continue its rally.

CAD (1.3650): The Canadian dollar has been experiencing a very “quiet” volatile trade. Oil has fallen ($82/bbl. Low) keeping the Canadian sellers in charge. While the market has been focused on the U.K. and Britian, oil prices rallied off it’s lows ($85/bbl.), supporting Canadian dollar buying. Support for USD/CAD is 1.3575 and not again until 1.3280. The Canadian dollar has three headwinds: Oil falling toward $72/bb. (recession), Fed does not take its foot off the pedal when raising interest rates and overall USD strength. Canadian buyers should actively hedge some of their payables at these levels. 50% is a good amount to take off the table.

MXN (19.9000): The theme we have been writing about when it comes to the Mexican Peso has been boring! The price activity from week to week has been limited to a small range with no real momentum either way. This past week, following the overall dollar “sell-off”, the MXN rallied against the dollar and is now back at the lower end of the range that began in early August. We know that the huge support area of 19.50 to 19.70 will be the hurdle for further peso strength. We also know that since January of 2021, that level has held all peso rallies. Consider this: while the USD has been on a 20% rally against nearly all currencies, it is flat against the peso. The peso is shrugging off the strength of the dollar because 1) the interest rate advantage supports the peso and 2) the peso trades inversely to the U.S. economy. A strong U.S. economy equals a strong Mexican economy and peso!

CNY (7.2280): The next chapter in Xi Jinping as the Communist Party leader begins. Without debate, beginning his third term, now makes him the longest Chinese leader since Mao Zedong. The most alarming result was the removal of former Chinese leader, Hu Jintao from the Communist congress! Taiwan is now at further risk of being taken over by mainland China which is top of mind for world leaders. USD/CNY has remained strong. Last week the pair rallied to above 7.28 before settling in near 7.23. Support is at 7.200 and resistance at 7.28. We have said thise many times, but now it is even more relevant with the “permanent” Xi in place; The PBOC does impact or control the Chinese currency. Their future actions will only benefit them.