FX Weekly

FX Weekly Update – September 19th, 2022

Posted Under: Weekly updates

The dollar begins the week slightly stronger than where it was 7 days ago. Now, that doesn’t mean the week had no volatility. Most currencies rallied early in the week and then the U.S. CPI printed higher than most forecasters were predicting. This immediately pushed U.S. yields higher and the equity markets tumbled. The dollar benefited from the turmoil and rallied. It stalled, and quietly moved lower with little volume. This week has a light calendar except for Wednesday’s FOMC meeting. We suggest marking the calendar for this one. Before the CPI number, the odds were split evenly between a 50bps hike and a 75bp hike. Today, the Fed Fund futures are 82% in favor of 75 bps and 18% for a full 100 bps! The greenback is set up for another move higher. Whether the Fed moves 75 or 100 bps, the dollar will initially jump, but only a full point increase will support it long term.  

European, U.K. and Canadian economic data is a mix of inflation and housing numbers. We would normally focus on the recent rate hikes by the ECB and Bank of Canada, but depending on the Fed, those central banks will be forced to follow the Fed. Ultimately, the dollar will benefit.  

EUR (1.000): The currency traded between 1.0032 and 0.9945 for most of last week. The path of least resistance for the euro is to move lower. We believe that the single-currency can fall to 0.9500, and then we will reassess. The 1.0032 area and then 1.0120 are the key resistance areas. 0.9862 has been the low of this current move. That will be a major line of support. The overall technical pattern does look similar to previous ones that also pointed for a lower euro.  

GBP (1.1400): The rally that the pound was embarking on early last week fizzled out and by the end of the week it had reached a new low for this move. 1.1350 was dealt after the CPI number, and now looks ready to be sold again! We have long held the view that the pound will trade at 1.1000 before any meaningful rally. These current levels are similar to those in 1985!  

JPY (143.15): Little economic news for the yen this week, but as always, we will watch the U.S. yield curve to provide the blueprint. The yen weakens as the gap between the U.S. yields and Japanese ones, widen. With the possibility of a 1% hike by the Fed, USD/JPY will most likely move to 145.00, which has been a resistance area. We have never experienced the Yen to be continually weakening. The BoJ does not want to change its policy, so the yen will struggle to gain any ground against the dollar, as well as most other currencies.  

CAD (1.3280): The BoC has been aggressive in their interest policy, hiking 75 bps. That alone should have the Canadian dollar much higher than where it is. But, now, it is falling oil prices that is causing the Canadian dollar to weaken. It has fallen (USD higher) below an important 1.3010 level, and is now focusing on 1.3400 and 1.3700. Support for USD/CAD is at 1.2800.  

MXN (20.0600): The lowest print last week was 19.7500 (long-term support), while the 20.1600 level was the highest. There is not much to discuss about the support level of 19.50-19.75, that has been holding USD/MXN from falling. While the market struggles with that support, it has failed to stage a rally that pushes for new levels. Now the question is, if the Fed does increase rates by 100 bps, will USD/MXN rally to 21.00? The recent activity suggests that any rally will be short-term. We suggest that the buyers of Pesos be prepared to buy the peso if it does move toward 21.000. Use forward contracts to swap those spot trades into forward contracts to match cash flow dates! 

CNY (7.0150): China has been steadily opening up their economy and that is most likely the reason the PBOC will continue to allow the currency to weaken. The Chinese factories are going to benefit from both lower oil prices and their weaker currency. In the near term, there isn’t a reason to think they may change the policy. We are now going to look for the major resistance areas of 7.15-7.20. Buying CNY for delivery into China has gotten cheaper, and the impact is to increase the margins for COGS and a cash savings.