FX Weekly Update – October 25th, 2021
Posted Under: Weekly updates
The dollar begins this week without much direction. Inflation is the theme behind the global markets and despite the data the Fed and the bank of England have indicated that the “transitory” inflation may last longer and be more troublesome. Interest rates, specifically in the U.S., have driven higher in the early part of last week but then backed off into the weekend. We would suggest this late week buying of U.S. treasuries is more a function uncertainty around global tensions than a relief from inflation. The dollar seems to be following the same pattern. Our short-term perspective is that the greenback will remain under pressure and there will be some short-term selling, which will be followed by a rally that will shake out the “weak” short dollar positions. Then the dollar will begin feeling the pressure of inflation, the near $30 trillion deficit and the slowing down economy.
The calendar this week will be highlighted by Wednesday’s Durable Goods data. Ex-transportation is expected to print a 0.4% number. Trade balance will also be released at the same time, with the previous months at –$89.4B (more imports than exports). Thursday will be highlighted by Core Personal Consumption expenditures and GDP (consensus 5.4%). The market also has the Bank of Canada, BOJ, and ECB rate decisions where these will all be looked at closely, but it’s the Canadian announcement that may have the most immediate impact, at least for USD/CAD.
EUR (1.1640): Activity in the single currency was subdued last week with more focus on the commodity currencies and the yen. Hourly charts are pointing toward a test of 1.1700 this week, which will provide a terrific opportunity for those that need to sell euro. The data out of Europe this week will include French consumer confidence, EMU business client, and consumer confidence. Thursday will be the big day with the ECB rate decision. Nothing indicates that there will be a change or even an indication of a reduction in their QE program. Once this is released, we would look for the euro to fall back toward the 1.1400 level, if not a touch lower.
GBP (1.3735): The pound’s failure to hold its gains near 1.3830 point to the possibility of another dip lower, potentially to 1.3630. Companies that have sterling expenses should be using the weakening currency as a chance to buy, either using forward contracts or their GreenShootsFX GBP account to purchase and hold until local sterling payments need to be made.
JPY (113.60): Last week’s dollar high was 114.58 and we begin this week 100 pips below that level. The yen weakness, and the speed at which it has happened, does not seem to be an issue for the BOJ. In fact, for Japanese exporters the weakness is welcome given they receive dollars and sell them for yen, they are getting more yen for each dollar of product sold! This is a key driver for Japanese profitability and a way to strengthen their economy, while the world continues to struggle with the covid recovery. There is no reason to believe that the BOJ will change their stance on interest rates this week. One way to capitalize on this weak yen is to leave orders to buy yen and sell dollars above the current market and if needed use forward or window forward contracts to “roll” them to match future cash flows.
CAD (1.2365): The Canadian dollar continues to march toward the 1.2000 level, which was the level it reached on May 31st. Oil prices are supporting the move as the supply issue, combined with the demand increase, is pushing above $82/bbl. This week the BOC will release their interest rate decision and you may recall they were the first G10 central bank to taper several months ago. That surprise pushed the currency quickly higher. Now, with oil prices high, and heading higher, and the currency already strong, if the BOC does surprise the market with another increase in the amount or frequency, expect CAD to move through the 1.2000 area and target 1.1700-1.1800.
MXN (20.1600): The peso rallied against the dollar but failed to follow through at the 20.4000 level, which is now a key resistance level. The trendline support at 19.9000 will contain any dollar weakness. We know we sound like a ‘broken record’, but the interest rates in Mexico are much higher than those in the U.S. and that math gives the buyer of the peso in the forward market a cheaper currency. Whenever there is transparency to future expenses, hedging a portion of those is best practices. For example, with the spot at 20.1600, buying pesos for delivery 6 months from now is an exchange rate of 20.7000! It is worth the time to explore this with the GreenShootsFX team to capture these forward points and provide stability to those expenses!
CNY (6.3800): The low for USD/CNY last week was 6.3637. That is the same area where the PBOC came into the market in April of this year and slowed down the CNY rise. These next several weeks will provide markets with information about the PBOC’s plan for their currency. We know that companies that are purchasing product from China in their local currency, have experienced higher costs from the stronger yuan and these costs will be passed along to the consumer, causing higher inflation. Margins will be impacted, and cash used to fund those purchases will increase. Paying the Chinese vendor with CNY, and hedging those payments, can give a competitive advantage, protect margins, and save money.