Forex Weekly Outlook – Currency Forwards and Option Hedging Strategies Rise with Soaring US Dollar

The US dollar has risen about 15% against a basket of currencies over the last year with rising U.S. interest rates and safe haven flows. The higher greenback has reduced the profits of U.S. multinational companies that convert foreign currency into dollars, multinationals such as Coca-Cola Co, Procter & Gamble and Philip Morris International are just some seeing an impact.

The US dollar is at a two-decade high against the Japanese yen, up 13% this year. Against the Euro is around a five-year high, rising 8% this year. Three-month volatility for the euro and the yen, against the dollar are at their highest since June 2020. Various hedging strategies using forwards and options are in use, which is also taking liquidity out of the financial markets. Hedging activity by advisor Monex’s clients rose 22% uptick in March 2022 versus 2021 and was up 24% for the first quarter compared with last year.


John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”

The stronger dollar has helped importers with a boost in their purchasing power from the stronger currency.

For the week, the U.S. Dollar Index jumped 0.7% to 103.66 (up 8.4% y-t-d), trading this week to a nine-year high

Majors:

  • For the week on the upside, the Australian dollar 0.2% and the euro 0.1%.
  • On the downside, the British pound 1.8%, the Swiss franc 1.7%, the Japanese yen 0.7%, the Canadian dollar 0.2%

Minors

  • For the week on the upside, the Mexican peso increased 1.5%
  • On the downside, the Brazilian real declined 2.1%, the South Korean won 1.4%, the South African rand 1.3%, the Swedish krona 1.3%, the Norwegian krone 1.1%, the New Zealand dollar 0.7%, the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.87% versus the dollar (down 4.66% y-t-d).

Asia

The yen has been the worst performing major currency in 2022, sliding around 13 per cent against the US dollar. Relative to a basket of trading partner currencies and adjusted for inflation, the yen has fallen to levels last seen before the 1985 Plaza Accord.

Asian currencies had a dismal April, decline included the Japanese yen down 6.2%, the South Korean won 3.5%, the Malaysian ringgit 3.5%, the Thai baht 2.9%, the Taiwanese dollar 2.9% and the Singapore dollar 2.1%.

Factor in that Asia is the epicenter of technology manufacturing – with the global “tech” Bubble in grave jeopardy. The confluence of China’s bursting Bubble, Japan’s foolhardy monetary policy gambit, and highly levered systems puts Asia today on a Collision Course with rapidly deteriorating macro and micro fundamentals. I’ll assume mounting hedge fund and derivative issues.

Japanese Yen – USDJPY

USDJPY broke above after weakness with Treasury yields to rush to +2/8 and channel convergence at 132.00 which saw selling back to +1/8. The price accelerated after the close above the Tankan over 114. The Tenkan is the natural balance of support ahead. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel. Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off

The Bank of Japan reinforced its commitment to low interest rates despite the rising inflation. The BoJ said it would purchase 10-year Japanese government bonds at a yield of 0.25% every business day to ensure that the yield doesn’t exceed that level. That sent the yen weakening to more than 130 to the dollar for the first time since April 2002.

Yen weakness places Chinese manufactures at a competitive disadvantage, which has emboldened Beijing to play the currency devaluation card in an attempt to mitigate mounting economic woes and dumping of Chinese assets. Higher-yielding Chinese debt securities are losing their relative appeal (in a rising yield world), and now even the perceived stability of the Chinese currency is in question.

China

  • USD/CNY is the onshore yuan and is permitted to trade plus or minus 2% from the daily reference rate.
  • CNH is the offshore yuan. USD/CNH has no restrictions on its trading range.
  • A significantly stronger or weaker rate than expected is typically considered a signal from the PBOC.

The CNY was the weakest since November 5 last year, 18-month low extending heavy losses sustained in April, after Beijing warned against criticism of its dynamic zero-COVID policy. The zero-tolerance approach, which depends on strictest lockdowns and mass testing, has weighed heavily on the already slowing economy and raised the need for further policy easing. The low was a retest of May/Dec 2019

 April 28 – Bloomberg (Sofia Horta e Costa and Tania Chen): “When China’s tightly managed currency depreciates dramatically against the dollar, it can be hard to stop. More than six years after China’s shock 2015 devaluation roiled global markets and spurred an estimated $1 trillion in capital flight, the yuan is weakening at a similar pace. Onshore it’s lost nearly 4% in eight days, while the offshore rate is heading for its worst month relative to the greenback in history. Selling momentum is the strongest since the height of Donald Trump’s trade war in 2018.”

 Australian Dollar – AUDUSD

The Aussie dollar since completing a 5 at the pysch 80 level to fall has continued to correct under the weekly cloud in emotive fashion. The Australian dollar fell to test of the lows of 0.6800 at 4/8 China lockdown fears and AUDUSD forwards. The recent double bottom is now resistance. Support is the Murrey Math Levels. Resistance also the Cloud, Tenkan and Kijun like many commodities.

New Zealand Dollar – NZDUSD

The Kiwi mirrored the AUD in its wave (iii) spit to lower channel wing. Momentum built from the cloud tap and rejected 50% Fib & 4/8 confluence. Kijun and Tenkan Resistance, which is pivotal. Support previous break spits and channel.

Canadian Dollar – USDCAD

The Loonie quickly spat the weekly flat topped triangle with the Tenkan support. Higher US yields has negated oil price impacting direction. Watch flat Kijun and Tenkan. Use Fibs for support and resistance.

Europe

The European Central Bank continues to lag behind the Fed in tightening monetary policy, ECB President Christine Lagarde said earlier this month, noting that the euro area’s economy is likely to absorb a greater blow from the war in Ukraine.

Euro – EURUSD

The dollar continues to rise against the euro closing at $1.04, the euro’s lowest closing rate since 2017. Euro continues to correct in what seems like eternal flags in the channel. We watch if Kijun (pink) testing Tenkan (orange) creates any impulse as EURUSD collapses in the channel. Watch 3 waves to see development for continuation. Watch for impulse off Chikou rebalance. Again, governed by EURGBP and Bund volatility.  

British Pound – GBPUSD

British pound classic retest of daily cloud break with magnet pull of cloud twist after ABC correction failure. From the GBPUSD low price below lows going back to May 2020 and a test of 2/8 from a +2/8 spit, giving us an 8/8 measured move. The move has been swift the high from early January was 1.3747the low 1.21543, a 1600 pip decline from high to low. The upcoming week will be heavy on UK data, which could mean an eventful week for the British pound.

Euro Pound – EURGBP

EURGBP broke the long bull pennant fueled by Tenkan thru Kijun to the 50wma as the pound collapsed (at a faster pace than the Euro) from there we saw a spit back to the channel break retest.

Mexican Peso USDMXN

The Peso continues in the long triangle and consolidated despite outside uncertainty from oil and COVID19. Use the Gann octave and the extension fibs to help measure the noise.

Turkish Lire USDTRY

The Turkish Lira’s slow decline continues after the wild 18-10 USDTRY swing last year reversed after falling in 3 waves to explode over the Tenkan, weekly cloud Kijun and 50wma below. The Murrey Math and Fib targets with last year’s Lire all-time lows in a hyper inflating collapse

 Sources: TC

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