Weekly FX Update – January 24th, 2022
Posted Under: Weekly updates
The week was volatile for equities, commodities, and bond markets, but the dollar is essentially unchanged. The headlines this week are focused on the sell-off in stocks, specifically the Nasdaq. Technology stocks are sensitive to rising interest rates. Equity weakness pushed the yield on the U.S. 10-year from 1.89% to 1.76% by weeks end. Early dollar weakness rolled into dollar demand to purchase treasuries. The result of last week: early dollar buying, followed by mid-week selling and end of week dollar buying. In other words, the dollar was unchanged.
The currency markets will be taking a back seat to other asset classes this week. Assuming more equity selling will most likely continue the rotation into bonds, creating the demand for dollars. In general, this will weaken currencies and provide another opportunity for importing companies to pick up cheaper currencies. This is a time to consider a GreenShootsFX currency account. While the FX markets remain stable and volatility is low, preparing for an uptick in both is key to a risk strategy. Picking up currency that protect or even enhance margins, while saving cash, address the two main components of FX management.
EUR (1.1340): The single-currency remains stable, even though the EUR/currency selling has been relentless. Cross currency pairs like the EUR/JPY, has dominated the euro. We warned about this over the last few weeks. Once the global equity markets become volatile, specifically from selling, the carry trades, i.e., EUR/JPY, the euro is sold, and yen bought. On the other side of the market are the EUR/GBP buyers. This important pair is defending the bottom of the long-term range of 0.8300. Together, these flows have contained the EUR/USD. We remain bearish about this currency pair, expecting one more leg down to test 1.1000/1.1200. Resistance is now at 1.1400, and more important is the 1.1500 level.
GBP (1.3540): The sterling continues to “head fake” the longs. After a week of higher highs, the currency sold off quickly after touching 1.3720. It is now just above the 38.2% retracement of 1.3160/1.3720 rally, which is 1.3520. Below that level is the 50% retrace at 1.3450. The U.K. was the first major economy to announce no more covid close downs. That didn’t support the currency, though. Higher oil prices, a nervous global equity market and of course inflation has moved cash to the dollar. We believe there is more room for the pound to fall, which of course provides buyers and opportunity to pick-up a cheaper currency. Look to buy GBP when it begins to print 1.3300. Keep in mind that buying weakness, or selling strength is a sure way to avoid the “picking tops/bottoms” mistake.
JPY (113.65): The yen benefited from the fall-out of the equity market. We have discussed the relationship between the S&P 500 and the yen crosses. The daily yen chart is pointing to further yen strength, at least to the trend-line support area of 112.50. Below there, the longer-term objective is 108.50. This would suggest there is a more sustained sell-off in global assets.
CAD (1.2570): One way to describe the Canadian dollar movement is “frustration”. Oil rallies to nearly $90/bbl., and then closes out the week at $84.50! The CAD gains on the oil rally, touching 1.2450, before the sell-off impacts the currency and it closes the week at 1.2570. A further bounce in the USD/CAD is likely, potentially as high as 1.2700. Caution will be both the oil and Canadian dollar trade. More unsure equity markets may cause a further sell off in oil. Concerns about growth, amid the inflation issue, and central bank’s raising interest rates, may dampen oil prices and support the U.S. dollar versus the Canadian dollar.
MXN (20.4500): Talk about a currency pair that has been forgotten. USD/MXN has been an afterthought in the FX markets. The daily ranges remain narrow and there has been little news to expand those ranges. We continue to believe that the peso will strengthen toward 19.8000. Risk to this is if the equity markets have a larger sell-off, and dollar haven buying dominates. Keep in mind that peso interest rates are much higher than those in the U.S. A sell-off in the peso can provide a good opportunity to buy and strip the spot purchase into forward contracts. 20.90, and then 21.30 are good levels to buy pesos.
CNY (6.3400): This is the first week that the CNY will be opening below 6.3500. Let’s look at what is behind this. First, the Chinese GDP disappointed a week ago and this past week the PBOC cut their interest rates. Both would lead to CNY selling and USD buying, but as the influence by the Chinese government pressures the PBOC, there will most likely be another test of the 6.2325 level that was traded in 2018! The risk with CNY is the currency is free-floating but still managed closely by the central bank!