FX Weekly Update – May 2nd, 2022
Posted Under: Weekly updates
Another week and another stronger dollar! With greenback pushing higher, with the USD Index (103.28) now at a level not seen since 2016, there are several currencies near very important support levels. The euro, sterling and Japanese yen are all at multi-year lows versus the dollar. The risk of these currencies breaking down further can make the dollar rally accelerate. This week the Fed will decide on U.S. rates and release that on May 5th. The expectation of a 0.5% hike has been priced into the market. Friday, the day after the announcement, is U.S. unemployment data for April when expectations are for 400K non-farm jobs and a steady 3.6% rate. The Bank of England will announce their interest rate situation this week as well. The market has sold GBP for the last two weeks so the BofE may be setting up for a 0.25% or even no rate hike. The ECB will also be meeting this week but there is no rate announcement expected.
EUR (1.0545): The hourly charts are pointing toward a potential euro move to 1.0600 so this is a short-term opportunity to sell euro. Given the interest rate difference between the USD and the single-currency, along with Russia cutting off natural gas to both Poland and Bulgaria which is now pushing Germany and Greece to supply it, there isn’t much reason to believe the euro has put a bottom in. We have been tracing out a large topping formation on the weekly chart. The measuring objective for this top is 0.8900. The currency has much to do before reaching that level but longer-term corporate treasuries should consider this in their budgets.
The ECB will meet, but there is no expectation for a surprise rate hike. We would not discount one, though, inflation will force their hands. Retail Sales are also released, and they are expected to be weak.
GBP (1.2570): Last week’s low of 1.2403 did put in place a short-term low. Current dealing should be capped at 1.2600. Any opportunity to sell pounds at 1.2600 should be looked at as an opportunity. Currency markets tend to move abruptly, put in a low or high and move quickly back in the other direction. It is common for the currency to move back to that high or low and we believe that will be the case on this fall to 1.2403.
Bank of England will highlight the data this week in the U.K. The BoE has raised three times since December. They may pause on May 5th meeting.
JPY (130.00): There has been much discussion around how quickly the fall of the yen against the dollar is impacting the Japanese economy. Last week the BOJ said they were not going to raise rates any time soon. The gap between U.S. rates and Japanese rates continues to widen. This alone will keep the yen under pressure. We have discussed 140.00 as a level that would start getting the BOJ involved. Companies that need to buy yen are actively purchasing the currency and should continue to do this.
CAD (1.2860): Crude oil has rallied (again) and begins the week at $104/bbl. Between this and the overall USD strength the Canadian dollar has weakened. 1.2900/ 1.3000 is a major resistance. Above this level, the next area of resistance is 1.3500, with an outside chance of 1.3700. This provides the buyers of CAD a much cheaper currency thus improving margins and saving cash – the two most important functions of managing currency risk.
MXN (20.5000): The peso has not been too volatile and will most likely remain range bound. Higher oil prices do support the Mexican economy but with the inflation and the miss on U.S. GDP in the first quarter (-1.4% v. 6.9%) the peso will remain at the current levels or even weaken further. Support for the peso is 19.50 / 19.75 and resistance is 20.75, 21.50 and 22.15.
CNY (6.6800): China is experiencing a self-inflicted wound. Covid cases have been escalating and the government ordered shutdowns in both Shanghai and Beijing. This has resulted in slowdowns in factories and is adding to global supply chain issues. The currency has fallen 6% since the end of February. The PBOC has allowed the currency to weaken and will continue to allow that. The resistance level of 6.8400 is the next logical step. Keep in mind that this weaker currency does provide a cheaper expense, at least from the perspective of the importer of Chinese manufactured product.