FX Weekly Update – September 6th, 2022
Posted Under: Weekly updates
The employment situation in the U.S. produced another positive report showcasing 315,000 non-farm jobs which was better than expected. While the rate ticked up to 3.7%, the market view was positive. The Fed has indicated that raising interest rates would slow job growth. This report does help the Fed with their confidence in doing the right thing to slow, stop and reverse inflation. What does this mean for the dollar? The greenback continues to move higher following the interest rate curve. The U.S. 10-year is dealing at 3.21%, but the 2-year is at 3.43%! The 2-year yield is highly correlated to the dollar, and it is leading the currency higher.
The U.S. has a very light calendar this week but the Bank of Canada and the ECB will be making their interest rate announcements. The BoC is expected to raise 75 bps, while the ECB is more of a mystery. Consensus is for a 50 bp increase, but there is more talk that the ECB will increase by 75bps. There is also a new U.K. Prime Minister: Liz Truss. She inherits an economy that is not performing well, an energy crisis and a currency that is at record lows. We wish her all the best as she assumes the reigns and works to turn all of those around!
EUR (0.9965): The currency reached a low of 0.9845, after dealing at 1.0079. We begin this week with all eyes on the ECB. Likely 50 bps, which the market has priced in. Outside chance of 75 bps will push the Euro at least to 1.0100. It will again be a short-term high as most indicators still point to the US dollar strength. The medium-term view is for the Euro to move toward 0.9500.
GBP (1.1580): The sterling is rebounding from Fridays low of 1.1445. The current 1.1580 is a trendline resistance level. With the new U.K. Prime Minister, Liz Truss, there is much for her to do. This positive move in the currency, to begin the week, is a reaction to this new leadership announcement. The headwinds continue to build for the U.K. economy. Natural gas prices are high, despite crude falling from the $124/bbl. high to the current $87/bbl. Natural gas is the main energy source in the U.K. Winter is coming and the colder temperatures will push the inflation numbers higher. The GBP remains at risk. The interest rate difference remains in the favor of the USD and that is going to be the main driver of the pound to continue toward 1.1000.
JPY (140.50): The Yen is weak and will most likely remain that way. The interest rate spread between the dollar and the yen is widening again. The Yen will most likely fall toward 141.50. There have been discussions around the Bank of Japan possibly intervening to slow the falling yen. The dollar has not stretched enough for intervention to actually have a meaningful impact. Support for ISD/JPY is 139.00 and 137.75.
CAD (1.3100): The Canadian is falling, mostly because oil prices are falling. But, with the BoC making their interest rate announcement this week, and most likely a 75 bp hike, the Canadian dollar is finding some support at 1.3250. For the last 12 months, USD/CAD has been moving higher, with a minor pullback. The target for the next pullback is 1.2900/1.2950.
MXN (19.9500): The peso fell to 20.3000, before rallying to 19.8750. This currency pair has really made a few head fakes over the last year. Each time the US dollar looks to fall through the support levels of 19.50-19.75, the dollar rallies enough to squeeze the weak positions to cover. The rally runs out of steam and the dollar falls back toward support.
CNY (6.9500): The next target is 7.0000, which is a very large level for the CNY. The PBOC may try and slow down the fall of the currency, but China’s severe covid slowdowns, along with their potential change in currency reserves will make any move to 7.1950 (April 2020). The risk is for the USD to fall against the CNY, but again, all economics point to a stronger dollar! The pair is going to remain between 6.90 and 7.10.