Inflation remains the story for the global economies. The U.S. is now facing inflation numbers not seen since the early 1980’s! The U.S. CPI was released last week and matched forecasts with the YOY number coming in at 7%. PPI also surprised to the upside with a 9.7% YOY print. The U.S. 10-year yield traded like a yoyo, nearing 1.80%, falling to 1.69% and beginning this holiday shortened week at 1.79%. There is no question that the dollar had priced in the high inflation numbers because its activity was limited. We are perplexed at this time. The FED may raise rates in 2022 four times which means, if we think about the academic definition of currencies, that the USD should rally. But, with inflation moving higher at the pace it is, that would mean the dollar loses purchasing power and falls. Technically, the dollar index (we are not a huge fan of the DXY because it is heavily weighted toward EUR, and does not include MXN), broke out of a long-term trendline in November of 2020, and spent the next several months losing value. By April of 2021 it had put in two bottoms and strongly rallied the rest of the year. Technical analysis would say that this powerful rally, back to the original trendline (see chart below), is healthy for the longer-term (think 10-year trend) fall in the dollar. Several inflationary pressures, including oil, electricity, beef, chicken, auto prices, and hourly income will not go away easily. The Fed will need to balance interest rates, inflation, employment, as well as a potential recession. That is a lot of unknowns for investors to be long the dollar.

Decide if these current levels will protect your margins and consider selling dollars and buying currency. Utilizing the GreenShootsFX accounts to buy currency and build a position for future payments, makes for a good policy!

USD Index Monthly

EUR (1.1410): The euro is following the path we have discussed the last several weeks. Printing 1.1491 last week, just below our resistance area (1.1500-1.1515). Beginning this week at 1.1410, above short-term support at 1.1400. We believe that the single-currency may fall back toward 1.1250 and possibly 1.1000. Buyers of the currency should be prepared to begin building a position if those levels are dealt. This coming week activity will be dictated by the U.K. inflation and retail sales numbers. Assume inflation higher and retail sales lower. The relationship between the euro and the pound will highlight any movement between the dollar and the euro.

GBP (1.3645): Quiet trading for the sterling ahead of their important inflation, retail sales and claimant numbers. These together can prompt the BOE to adjust their rates higher. You may recall they did hike in December. This, along with Covid cases peaking and now falling on the U.K. should keep the pound “bid” against the dollar, euro and other currencies. 1.3700 was a good resistance level last week and we will continue that it should contain GBP until the numbers later in the week. Buying any dips below 1.3600 is prudent.

JPY (114.60): The BOJ will announce any interest rate policy change on Tuesday. There is no expectation (we checked 10 financial firms’ forecasts) that they are going to change policy. It currently has the O/N rate at –0.1% and the 10-year yield at 0%. The yen has gained strength partially due to the volatile interest rate scenario in the U.S. and equity markets. Looking ahead it is likely that the yen will fall back to at least the 116.35 level it traded on January 4^th.

CAD (1.2520): No question that the Canadian dollar’s strength is related to the price of oil. This past week, WTI rallied all the way back to last year’s high of $84.65. It does not seem as if OPEC has any interest in pumping more oil. These soaring prices will remain for some time. The Canadian dollar is rallying on those prices along with a strong Canadian economy. We have discussed that the Loonie will trade 1.1800/1.1700 before it enters a more sideways pattern. We maintain that thought even as the Fed prepared to raise rates. The BoC will match those hikes and get out in front of them. This would increase volatility but should not change the direction of the Canadian dollar.

MXN (20.30): Almost NO movement in the peso last week. Should we say that the peso has hit “equilibrium”? Same number of buyers versus sellers? Sure! There is just no reason for the market to get excited about the peso. 2021’s volatility may take time to overcome. We always believe that purchasing pesos in the forward market is the best way to manage Mexican expenses.

CNY (6.3500):  The headline for the week is that the PBOC “cut” their interest rates after a disappointing GDP number of 8.1% of which the components were very weak. The Chinese government will begin using other tools to defend against a slowing economy. The CNH/CNY has maintained its strength against the USD. This week the currency may attempt to push toward 6.3000. The interesting observation about the currency strength is that the PBOC cut two rates!  A strengthening currency while interest rates are heading lower? The latest birth data for 2021 was released. For the 5th straight year, the Chinese are having fewer children. It is now at a historical low! This may sound like a sidebar conversation, but the Chinese economy has been one that utilizes its citizens to manufacture for the world. Less babies, smaller workforce! Yet the CNH/CNY remain strong. Is the currency “undervalued” and once the PBOC pulls dollar support, will it rally below 6.0000? That would be another inflationary shock to the global economy