The US dollar rally continued again this week benefiting from safe haven and yield chasing flows. 10-year Treasury yields underpinning yen pairs with carry trade impact. Fed Chair Jerome Powell’s remarks at Jackson Hole renewed commitment to combating inflation prompted traders to elevate their expectations for another rate hike within the year. The yen fell to ¥146.6 per dollar after Jay Powell’s speech at one point. That was the lowest level against the dollar since November on Friday, pressuring the BOJ to tighten its ultra-loose monetary policy and support the faltering currency.
The Swiss Franc catching the safe haven vibe, especially against both Euro and Sterling. Sterling and Euro were the week’s major underperformers. The disappointing set of services PMI data confirmed the slowing pace of economic activity in both UK and Eurozone.
Notably with all the anti US chatter surrounding BRICs and China and Japan selling Treasuries the data says otherwise. Fed’s custody of Treasuries and Agencies for foreign central banks has risen by about $10billion in the past four weeks.
Risk off again was the feature of the week. Higher yields are widening the spread for currency swaps. Emerging markets are the hardest hit.
It is all relative. Yield support is supporting the USD but at the same time higher yields leave it more exposed to the structural headwinds such as the bank crisis in March and the massive debt balances and no surprise Fitch and Moody’s ratings cuts. Combined deficits (fiscal and current account) are now a little over 10% of US GDP in Q1, the biggest joint shortfall since 2012 outside of the Covid period. This is where volatility becomes supportive if that a global phenomenon.
In this environment upside risks to the USD cannot be ignored, safe haven value or a resurgence in market volatility support the dollar. Even if the Fed rate cycle appears nearly complete and recession risks appear to be ebbing. Higher market volatility would be USD-supportive. Geo-political risks appear less pronounced now than a year ago but remain a clear background risk. Only this week Putin refused the Black Sea shipping deal and began shelling Ukraine ports. Always expect the unexpected in war.
Forex Weekly Analysis and Outlook – US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Chinese Yuan, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate.
We continue keep eyes on the bond market, as we have said the US 10-year Treasury peaked around 4.33% on the same day as the US dollar peaked against the yen USDJPY 151.95 on October 21.
To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.
We had seen the USD pull back significantly from highs getting many players short again and the BRICS ideology adding to further emerging market weakness in their debt and currencies.
Recall this? Almost at the base of the latest move higher. “The dollar’s grip as the dominant global currency is loosening, credit rating agency S&P Global’s top economist said… Aggressive U.S. sanctions such as last year’s freezing of hundreds of billions of dollars’ worth of Russia’s reserves has seen a flurry of countries start to do some trade in currencies other than dollar as well as repatriate gold reserves. The dollar ‘doesn’t have quite the pull it used to,’ Paul Gruenwald, S&P’s chief economist, said at a conference… ‘There’s a fragmentation around the edges’. Gruenwald pointed to a number of examples where countries were now circumventing the dollar: ‘We’ve got other things happening outside of the dollar world’.” July 12 – Reuters (Christopher Bing and James Pearson)
Weekly Recap and Outlook
How Foreign Exchange Prices Finished August 25, 2023
- For the week, the U.S. Dollar Index rallied 0.8% to 104.19 (up 0.7% y-t-d). 2022 gains were 8.2%.
- For the week on the upside, the South African rand increased 2.0%, the Brazilian real 2.0%, the Mexican peso 1.8%, the South Korean won 1.0%, and the Singapore dollar 0.1%.
- On the downside, the British pound declined 1.2%, the Japanese yen 0.7%, the euro 0.7%, the Swedish krona 0.7%, the Norwegian krone 0.5%, the Canadian dollar 0.4%, the Swiss franc 0.3%, and the New Zealand dollar 0.3%. The Chinese (onshore) renminbi declined 0.04% versus the dollar (down 5.33%).
COT on forex Aug 22: Specs cut their #dollar short vs 8 IMM futures and DXY by 12% to a six week low at $13.8bn. Biggest changes were buying of GBP ($0.6bn eq.) and selling of JPY ($1.2bn) and AUD ($0.7bn). @Ole_S_Hansen
Higher for longer is a serious threat.
Global Yields Spiking Higher
Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. This may well be a push over the cliff for troubled commercial real estate (CRE). Leveraged lending and leveraged finance gets more costly. Simply there are trillions of floating rate loans among individuals, speculators, businesses, and nations.
Contagion Emerging Market (EM) bond yields reversed sharply higher.
Emerging Market (EM) CDS jumped 19 to 222 bps, the largest weekly gain since the banking crisis week of March 17th.
- Vietnam CDS rose 13 to 128 bps,
- Philippines 12 to 114 bps, Indonesia 12 to 93 bps.
- Panama CDS surged 21 (largest gain since September 2022) to 118 bps,
- Colombia 21 (largest since March) to 229 bps,
- Brazil 18 (March) to 192 bps, Peru 16 (March) to 87 bps,
- Mexico 10 (March) to 115 bps.
Emerging Market (EM) bond yields reversed sharply higher.
Following the increased funding needs and Firch downgrade the move higher in US yields saw “risk off” extended to the emerging markets. EM currencies quickly under pressure with global risk aversion. Even after Friday’s rally, the week’s losses were meaningful.
Dollar denominated EM debt surged higher
- Peru jumped 27 bps to a five-month high 5.67%;
- Philippines 31 bps to a five-month high 5.26%;
- Indonesia 29 bps to a nine-month high 5.27%;
- Brazil 23 bps to a near 10-month high 6.59%;
- Mexico 19 bps to a nine-month high 5.95%;
- Chile 22 to a nine-month high 5.42%.
Local currency yields
- 132 bps in Brazil to a two-month high 11.24%.
- Mexico yields jumped 27 bps to 9.33%,
- Colombia surged 46 bps to 10.89%.
Yields are one of the biggest influencings on currency prices. The bond market focus has shifted towards fundamental developments and away from monetary policy.
Treasury market gyrated all week. The 2-yr note yield trading range was 4.92% to 5.09% and settled the week at 5.05%, up 14 basis points for the week. 5.09% in Friday trading surpassing the March 8th (pre-SVB) peak to the high back to June 2007. The 10-yr note yield trading range was 4.18% to 4.36%, the high since November 2007 and settled the week at 4.24%, down one basis point for the week. Thirty-year mortgage rates rose eight bps this week to 7.30%, the high back to December 2000. MBS yields traded up to 6.27% in Tuesday trading, the peak since July 2007, before ending the week down seven bps at 6.08%.
This week’s action put renewed pressure on the slope of the yield curve, compressing the 2s10s spread by 15 bps to -81 bps. Crude oil narrowed this week’s loss to about $0.80, or 1.0%, while the U.S. Dollar Index rose 0.1% to 104.08 Friday, extending this week’s gain to 0.6%.
US Yield Watch
- 2-yr: +4 bps to 5.05% (+14 bps for the week)
- 3-yr: +3 bps to 4.74% (+10 bps for the week)
- 5-yr: +3 bps to 4.43% (+5 bps for the week)
- 10-yr: UNCH at 4.24% (-1 bp for the week)
- 30-yr: -1 bp to 4.29% (-9 bps for the week)
Key Catalysts that empowered latest Treasury sell off:
- July 27th Bank of Japan surprised markets when it shifted from a 10-year JGB yield target range of 0% +/-50bps to greater tolerance toward allowing a higher effective limit.
- August 1st Fitch Ratings downgraded the US government’s credit rating from AAA to AA+
- August 2nd US Treasury’s refunding debt sales schedule was revised up by more than anticipated. This added supply was the first increase in quarterly refunding amounts in about two years. Treasury guidance pointed toward increased auction sizes from August through October and guided that there was more to come:
“Based on projected intermediate- to long-term borrowing needs, Treasury intends to gradually increase coupon auction sizes beginning with the August to October 2023 quarter. While these changes will make substantial progress towards aligning auction sizes with intermediate- to long-term borrowing needs, further gradual increases will likely be necessary in future quarters.”
August 9 – Wall Street Journal (Telis Demos): “Regional bank stocks have been on a tear lately. But what is happening with their bonds should be a wake-up call. On Monday, ratings firm Moody’s… took action on 27 banks, including downgrading the credit ratings of 10 and putting others under review or giving their ratings a negative outlook. Credit ratings are very important for banks, which fund themselves partly with deposits, but also by selling bonds. Many of the reasons for the actions will be familiar: Rising deposit costs and risks to commercial property and construction loans posed by the shift to remote work. They might even feel a bit tired, after second-quarter earnings reports showed that many regional lenders had reversed or slowed deposit outflows…”
The Strong US Dollar Effect on US Economy and Rates
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.”
Euro – EURUSD
EURUSD after testing the Kijun continued its reversal back to the sphere of influence congestion, picking up speed after breaking the Tenkan which we closed above. Below there we have the 108.00 then 106.50-1.0700 and cloud top. Completive following the throwover to the 20-year low at $0.9535. Resistance the tenkan and sphere of influence.
The European Central Bank (ECB) appears poised to raise its benchmark rate to 4.00% through September and keep interest rates at elevated levels for a protracted period until core inflation pressures ease more sustainably. Eurozone-US spreads have narrowed, but the USD retains a substantial premium at present.
On the way down Euro had been cascading in what seems like eternal flags in the channel as it spat the Tenkan. This pattern is one to watch moving forward should it remerge. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility.
Now that has flipped European growth momentum builds as the impact of the Ukraine war eases while market pricing anticipates US monetary policy easing earlier and more rapidly than in Europe.
Keep in mind prior recoveries had all lead to failure, the July attempt at a bullish breakout above previous resistance at 1.0270 failed and from there the Euro tumbled. EUR/USD bulls were unable to push the pair meaningfully above the long-term previous-support-turned-resistance level at 1.0350. That comes in from the low set at the start of 2017 and overlaps the 50-day EMA which has defined the downtrend over the last six months within the downtrend channel.
The Effects of Euro Depreciation and Response
“We can be gradual, but we should not be slow and delay normalization until higher inflation expectations force us into aggressive interest-rate hikes,” ECB’s Villeroy said Saturday. “What remains essential, however, is to be orderly, in order to avoid undue market volatility and ultimately economic volatility.”
Analyzing that move through Parity
The Euro did finally breach parity in July, if you recall the first attempt recovered off lows earlier this year after Dutch central bank chief Klaas Knot said if inflation continues to climb then rates may need to be raised 50bp, this was the first time such an aggressive shift has been suggested. However, it gave all those gains back. The low just over 1.5% away from reaching parity with the dollar. It was all the way back in 2002 that the euro and dollar last reached parity. The Euro reversed off the lowest closing rate since 2017 at the outer channel extended gains to above $1.07 before settling back lower again. The short covering rally enabling a reloading of US dollars. From there we got the sharp lows below parity which we are now correcting.
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.
British Pound – GBPUSD
The British pound ran all the way to test the break retest at 6/8 around 1.32 after tested the top of the channel break after lower since its double top and identified sphere of influence at 4/8 and went through it. GBPUSD broke above the 61.8% of the range since 2021 high at 1.27605 this week. What is clear is the move against the Euro as we see in the EURGBP cross. The question is this consolidating a corrective wave higher since it responded to its vicious move down in July to blast out of the sphere of influence to the cloud base and has since retraced to the median after hitting the 50% (as shown) and reversing. Majorly support is the channel, at the Kijun and 100dma support at 1.2287.
Below there is the March 24 low at 1.2190, the 1.2000 psychological level at the cloud top. Cable’s Chikou balanced at week’s end with that power move off the tenkan.
Last year GBPUSD reversed after 1985 lows & spat fib extension 1.618 level 1.1432 with previous low & -1/8. Above channel Tenkan confluence & sliding Kijun. Use Fibs and MM. The GBP has recovered more than three-quarters of its sharp 2022 decline and is likely to remain well-supported by positive yield spreads moving forward, even as very tight monetary policy will compromise the UK growth outlook.
UK underlying inflationary pressures still pressure despite the Bank of England’s (BoE) aggressive policy tightening. More tightening is expected in August. UK bond yields are trading at a premium to US rates along across most tenors of the yield curve (around 40bps for 10-year bonds), and rates are likely to remain elevated relative to the US for some time to come. The pound (GBP) has clearly benefited from healthy yield spreads and allows investors to overlook stagflation risks, for now, at least.
Euro Pound – EURGBP
EURGBP screams false breaks, this week EURGBP took out the lows from early June at 0.85667 and traded to 0.8543 below swing lows from December 2022 between 0.8546 and 0.8559. The price has worked its way down since After exploding higher to 8/8 at .93 it reversed to back test the 50wma and cloud break to the outer median line where it advanced significantly through the top of the channel back through 86. EURGBP has dribbled lower out of the resistance at the sphere of influence.
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
Dollar strength has been seen hardest on USD/JPY, accelerating with a break higher, this week we saw a respite around the 140/141 congestion from last year’s move. Wider yield spreads versus much of the rest of the world have left the yen as the weakest major currency this year (down 5.5% versus the USD). The JPY is also down 17% since the end of 2021.
Lower US yields following the decline in the US June CPI data allowed the JPY to recover some ground after sliding to 145 at the end of last month, prompting renewed warnings from Japanese monetary officials about the yen’s softness. However after a Bloomberg article saying no change to Bank of Japan’s (BoJ) yield curve control policy USDJPY quickly back off support and over 141.
Last year USDJPY spat 8/8 with a 151.95 high back to the Tenkan, energy has rebalanced since then. Chikou has not yet rebalanced on the up-move last week. Use your USDJPY Murrey grid for now. EURJPY & AUDJPY will determine risk on/off. The Tenkan is the natural balance of here.
We now watch this move if it is correcting the move of last year and for another leg up or we are merely in an ABC correcting that peak.
“The Bank of Japan has eased controls on its government bond market, altering a cornerstone of its ultra-loose monetary policy and prompting a surge in the country’s benchmark bond yields to the highest level in nine years. In an unexpected move, the BoJ said it would offer to buy 10-year Japanese government bonds at 1% in fixed-rate operations, in effect widening the trading band on long-term yields. The central bank added that it was technically maintaining its previous 0.5% cap on 10-year bond yields, but this level would be a ‘reference’ rather than a ‘rigid limit’. The move triggered confusion about whether the central bank would make further moves to unwind its easing policy, which has come under pressure this year from inflation that has hit four-decade highs. But the BoJ held its overnight rate at minus 0.1%, saying more time was needed to sustainably achieve its 2% inflation target.” July 28 – Financial Times (Kana Inagaki, Leo Lewis and Hudson Lockett):
Let’s revisit last’s years for levels. USDJPY power move was clinical, it pushed to a new high at levels last seen in 1998. Prices confirmed a breakout above 139.391, the previous 2022 peak from July. The move higher was fueled after it corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. USDJPY traded to 145.89 above the 78.6% Fibonacci extension at 140.636 and 100% level at 143.425. Above here was the 1998 peak at 147.65. Eventually the USDJPY topped out at 151.95.
Yen Crosses Expansion
The major JPY crosses all had big moves the week after the BOJ yield curve story. EURJPY GBPJPY AUDJPY all are on the carry trade move.
Hong Kong Dollar Under Pressure
“The Hong Kong Monetary Authority intervened to prop up the local dollar for the first time since February as carry trades against the currency push it past the weak end of its trading band. The HKMA bought HK$7.1 billion ($905 million) worth of the city’s dollars on Monday, shrinking the city aggregate balance, a measure of interbank liquidity, to HK$69.9 billion.”April 3 – Bloomberg (Chester Yung and Matthew Burgess)
“Hong Kong’s interbank liquidity is approaching the lowest level in three years following a series of intervention by the city’s de facto central bank to defend the local currency’s peg to the dollar. The Asian financial hub’s aggregate balance stands at HK$57.2 billion ($7.3bn) Friday, a whisker away from the HK$54 billion floor seen in much of 2019 and early 2020.”April 13 – Bloomberg (Chester Yung)
- 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 IMF lifted the yuan’s weighting in its Special Drawing Rights currency basket in May
USDCNH Technical Analysis
Last year USDCNH spat +2/8, to test the April Highs and recalculated. China’s renminbi had hit its weakest level against the dollar since 2007 as concerns over President Xi Jinping’s appointment of a harder line leadership team and a struggling economy spread from equities to currency markets.
It caught the impulse power of USDJPY and followed through since on the correction. Resistance is MM levels and the Kijun and 4/8 for now. Support the previous high/low as marked and 0/8.
China’s Yuan, Japanese Yen, the British Pound and the Euro have seen significant moves given their geopolitical dynamics.
A Week of Frantic Intervention in the Yuan
August 22 – Bloomberg: “China is escalating its defense of the yuan, pushing up funding costs in the offshore market to squeeze short positions and setting a new record with its stronger-than-expected reference rate for the currency… The offshore yuan reversed earlier gains to weaken Tuesday, dropping back toward its 2023 low set last week. The People’s Bank of China set its daily fixing for the currency at 7.1992 per dollar Tuesday, compared with an average estimate of 7.3103 in a Bloomberg survey. That was the largest gap since the polls began in 2018.”
August 21 – Bloomberg (Yumi Teso): “Funding costs in China’s offshore market rose by the most in six years amid speculation that authorities in Beijing are making it more expensive to bet against the currency. One-month offshore yuan swap points — a measure of the costs to borrow the yuan — jumped 1.73 bps, the most since 2017 as the yuan gained Monday. As a result, the one-month implied yield surged to 5.5% from 2.7% on Friday…”
August 21 – Reuters: “China’s major state-owned banks were seen actively mopping up the offshore yuan on Monday…, as the currency comes under growing pressure from a darkening economic outlook and strain in the property sector. State banks often act as agents for China’s central bank in the offshore foreign exchange market, but they could also trade on their own behalf or execute their clients’ orders. Tightening up offshore yuan liquidity could also act to stabilise the yuan… The move effectively raised the cost of shorting the Chinese yuan , at a time the local unit is facing mounting depreciation pressure.”
August 24 – Reuters (Winni Zhou and Tom Westbrook): “Increased yuan bill sales by China’s central bank in Hong Kong this week helped tighten liquidity in the offshore market to help stabilise the yuan by making it expensive for speculators to short the currency, according to a former central banker. The comments by Sheng Songcheng, a former director of the People’s Bank of China’s (PBOC) statistics and analysis department, were reported by the state-owned Shanghai Securities News…”
August 25 – Reuters: “China’s central bank has asked domestic lenders to scale back outward bond investments according to two sources with direct knowledge of the matter, the latest in series of increasingly strong steps to support the yuan. The directive… is for banks to restrict southbound purchases under the Bond Connect scheme, and is aimed at limiting the supply of yuan offshore, the sources said.”
China cracks widening
China today has the largest banking system in the world, rapidly approaching $60 TN. It is meaningful that China’s “big four” bank CDS spiked higher (w/w 8/18/23)
- Bank of China CDS surged 22 (biggest move since November) to 86 bps.
- China Construction Bank jumped 21 (biggest since October) to 98 bps,
- Industrial and Commercial Bank 21 (October) to 98 bps,
- China Development Bank 17 to 90 bps.
Developer bond collapse continues at pace, “last man standing” Vanke CDS spiked 404 to 884 bps, while the company’s bond yields surged 336 bps to 12.04%.
The “AMCs” aka the “bad bank” asset management companies created back in 1999 to clean up a troubled banking system are holding water and bursting.
- Huarong CDS spiked 161 this week to 652 bps – the biggest move since March.
- China Orient surged 45 to a near record high 372 bps,
- China Cinda rose 38 to 282 bps.
Australian Dollar – AUDUSD
The Aussie got a lift last Tuesday when the RBA unexpectedly raised the cash rate and signaled further tightening to control inflation. The Australian dollar from there rebounded from a week low of 0.6578 on Monday to a Friday high of 0.6750 closing the week near the 100dma at 0.6740. The 200dma is at 0.66905. Those levels are held at we saw a drive higher to .6870 at the cloud top.
The Aussie dollar is coming off a large base, still within in a channel after it began correcting the rally on optimism about China’s economy reopening & the prospect of a higher RBA cash rate, which it got. The Australian dollar however has been a relative under-performer among the majors in the past four months. Australian terms of trade deteriorated rapidly in recent months. Coal prices have steadied after halving in price since the start of the year, iron ore prices have sold off with weak Chinese demand, weighing on AUD sentiment. With pullbacks in commodities and a rise in US rates we have seen the AUD reverse off the July and cloud top confluence at Northern sphere of influence.
To reflect potential upside, we look at the way down AUDUSD with cloud, Kijun and channel confluence over $0.7200 with 5/8 and previous 38% now the pivotal resistance. Note the reversal at the top of the channel. Since completing a 5 at the psychological 80 level it had fallen & corrected under the weekly cloud in emotive fashion. Support is the $0.6575-$0.6600 and resistance at the cloud top in the 68/69 area.
Support is the Murrey Math Levels. It was the strongest major currency against the USD last July after the Yen correction so keep an eye on the basket should a bounce come into effect.
AUDJPY is up 3.7% this week which is the largest gain since March 2022 when the pair moved up 3.86%. AUDJPY is only trading at the highest level since September 2022. The high price then reached 98.599. The high price Friday 97.39. The September 2022 high was 98.599. Highs from 2014 at 102.844 and 2013 at 105.043 would be the next major targets.
New Zealand Dollar – NZDUSD
The Kiwi headed back to its reversal level off the 61.8% level after it bounced off its sphere of influence at -1/8, a two year low with the dollar soaring this week. With the dollar weakening, the kiwi rallied. Strength also came from the NZD/JPY testing highs, with 2015 levels at 94.00 in sigh. The point is yields, China reopening and a weak yen. On the way down it outran the Aussie lower after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there.
The New Zealand dollar has under-performed among the majors in the past three months with terms of trade deteriorating. Looking back last year NZDUSD broke the yearly low (0.6061) after failing to test the June high (0.6576) the flood gates opened. The Kiwi has recovered beyond those levels quickly testing the negative slope breaking the string of failed attempts to push through Kijun resistance.
Canadian Dollar – USDCAD
The USD/CAD moved to a low of 1.3192 the 50wma, the price back down to through the May low near 1.33132. The Canadian dollar has strengthened modestly since the start of June, rising some 2% against the generally weaker USD. The USD sellers for now remain in control and a breach of the May low was the next key. Take a broader look at the daily chart below, the May and April lows along with other swing levels going back in time at 1.3296 – 1.33203 are now resistance.
The CAD has, however, underperformed most of its major currency peers over that time frame. The CAD has weakened against the AUD and NZD. Watch flat Kijun and Tenkan feed the energy. Use Fibs for support and resistance. Eyes are on the recent decline in energy prices.
The domestic economy has outperformed relative to expectations, and the labor market remains tight. The Bank of Canada (BoC) paused tightening monetary policy in January but moved to lift interest rates again in June in response to economic developments. More tightening cannot be fully excluded in the next few months.
We have retraced that USDCAD bounce off the Kijun to above the tenkan off the 50%. The shift in the Canadian/US rate curve impacts the shifts. The psychological level at the 61.6 fib at 1.3659 at 4/8 confluence was like a magnet. Loonie weakness amplified by the weakness in crude oil prices, vice versa strength in oil prices flows through.
The Canadian dollar has not been able to rally significantly against the USD, that said, nor has it weakened, the 1.35 level being a magnet. Bank of Canada’s (BoC) policymakers have been keen to push back against the market pricing in interest rate cuts at the end of the year. Following the April policy decision, Governor Macklem expressly stated that a rate cut by year-end was not the most likely scenario.
Emerging Market Currencies
Last year we saw seen a run-on EM market which unleashed a dangerous dynamic. We have seen EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” Nomura has warned 22 of the 32 countries covered by its in-house “Damocles” warning system have seen their risk rise since its last update since May to the most vulnerable since July 1999 and near the peak at “the height of the Asian crisis”. Seven countries, Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary are now at a high risk of currency crises.
When global liquidity flows abundantly, financial flows originating from U.S. trade deficits and leveraged speculation often find their way into higher-yielding EM securities. These flows end up at EM central banks, where they are conveniently “recycled” back into U.S. markets through (chiefly) purchases of Treasuries, agencies and other debt securities.
“Some of the world’s poorest economies embraced borrowing in their own currencies as a shield from painful swings in the U.S. dollar. Now that strategy may be coming back to bite. Debt issued by emerging-market governments and companies in their local currency reached $12.5 trillion in 2021, according to… Bank of America that excludes China’s enormous borrowings in the yuan. That compares with $4 trillion in foreign-currency debt. The fate of local-currency debt has become a key stumbling block in debt-restructuring negotiations in Ghana, Sri Lanka and Zambia. And it is forcing investors, policy makers and economists to rethink what an emerging-market debt crisis looks like.”December 4 – Wall Street Journal (Chelsey Dulaney)
EM tightening cycle fragility (aka “taper tantrum”) is not a new phenomenon. This is, however, the first episode of highly levered (securities markets and real economies) EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” With the global liquidity backstop now nebulous, there is every reason for the leveraged speculators to move more aggressively in exiting levered EM “carry trades.” And resulting outflows lead to only weaker currencies, more EM central bank Treasury (and sovereign debt) sales, and greater stress on global financial stability.
Mexican Peso USDMXN
The USDMXN keeps on falling since the break of its triple bottom which saw Peso gains accelerate after breaking from the sphere of influence and spitting the tenkan. The Mexican peso’s bull run extended to push the USD back to levels last seen in 2015. Use the Gann octave and the extension fibs to help measure the noise.
The MXN’s rally through the 17 level is the result of positive inflows from remittances and the big move on US rates down and the Mexican central Bank raising more than expected helped it penetrate the long sideways pattern and consolidation despite outside uncertainty from oil and high rates. The wide interest rate cushion over rising US interest rates, resulting in solid demand for the MXN via carry trades.
The Mexican peso remains the best-performing major currency against the USD year on year. The peso has been with an aggressive Banxico rate hikes that have striven to fight domestic inflation and maintain a significant yield advantage over the USD as Fed policy has tightened. High yields and relatively low volatility are making the MXN an attractive carry trade vehicle for investors.
Caution there with slowing inflationary pressures suggesting the central bank’s aggressive tightening cycle may be close to an end.
Structural positives (onshoring) count as medium-term support for the MXN as well. The MXN rally is starting to raise competitive concerns among local exporters and while the Banxico’s aggressive tightening policy is poised to reverse later this year, anticipated rate cuts over the coming year are less than the MXN’s regional peers, which may slow MXN losses versus the USD as carry-seeking investors shift from the likes of the Chilean peso (CLP) or Colombian peso (COP).
Turkish Lire USDTRY
The selling of Turkey’s lira appears unabated. a brief consolidation near 23.60-80 and he we are over 26. The latest Erdogan inspired turmoil saw the lira selloff. The USDTRY has been one way after spitting 17 against the dollar. USDTRY barely took strength from other emerging markets big reversals. Since we broke the all-time Lira low of 18.4 hit in December it has headed towards +1/8 over 20 and beyond.
The appointment of Hafize Gaye Erkan, a U.S.-based senior finance executive as central bank governor was a seen by some as a good move, others as just window dressing. The reality is potential the market wanted a rate hike to around 25% from 8.5% – they got one to 15% at the central bank’s scheduled meeting on June 22.
Erkan is the fifth central bank chief in four years and succeeds Sahap Kavcioglu, who spearheaded Erdogan’s rate-slashing drive since 2021. Turkey’s monetary policy decisions have not been based on economic fundamentals, since late 2021 seeing a cumulative 850bps cut in rates in a matter of months to current levels.
USDTRY Technical Notes:
To recap 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. The lira is the worst performer in emerging markets, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year.
Under Erdogan’s unorthodox programme, authorities had been taking a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves this year alone to hold the lira steady. Following his re-election last month, Erdogan signaled a U-turn at the weekend by naming Mehmet Simsek, a former deputy prime minister well-regarded by foreign investors, as Turkey’s new finance minister. Simsek later said economic policy needed to return to “rational” ground and there were “no quick fixes” for policy.
Under pressure from the president, a self-described “enemy” of interest rates, the bank under Kavcioglu cut its main rate to 8.5% from 19%, sparking a historic lira crisis in 2021 that sent inflation to a 24-year high above 85% last year.
The central bank’s net forex reserves hit an all-time low of negative $5.7 billion as of June 2, data showed on Thursday, with demand having surged through the elections.
The background until after the election was the same with President Recep Tayyip Erdoğan vowing to cut interest rates despite spiraling inflation. In December last year, the Turkish Central Bank introduced a “Lira deposit scheme” to stem the decline in the currency. The Turkish president said that the country had ‘wasted years’ with the misguided view that prices should be controlled by using higher borrowing costs to suppress consumption. Such policies, he said, benefited only ‘those living a charmed existence and filling their pockets with [the proceeds of] high interest’, including foreign investors.”
Central Bank Rate Watch:
The week a head’s greatest risk is the speeches at Jackson Hole, this year’s theme is “Structural Shifts in the Global Economy”. Chair Powell kicks off the event with an economic outlook speech on Friday at 10:05amET. They will follow likely increases in China’s 1- and 5-year Loan Prime Rates following through on the PBOC’s 15bps decreased in the 1-Year Medium-Term Lending Facility Rate on August 14th from 2.65% to 2.50. Bank Indonesia, Iceland and Bank of Korea are expected to keep rates on hold. Turkey’s central bank is expected to deliver another large hike this week. We also have the annual BRIC’s summit of interest.
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USD vs Currencies for First Half 2023
USD vs Currencies for June 2023
- EUR: -2.06%
- JPY: +3.58%
- GBP, -2.07%
- CHF, -1.71%
- CAD -2.38%
- AUD: -2.45%
- NZD: -1.96%
For the 1H of 2023, the USD was mixed up 10%+vs the JPY and higher vs the AUD and the NZD, The dollar was lower against the EUR, GBP, CHF, and AUD. The dollar was the weakest vs the GBP (down 5%):
- EUR: -1.96%
- JPY” +10.07%
- GBP: -5.03%
- CHF: -3.16%
- CAD: -2.16%
- AUD: +2.27%
- NZD: +3.33%
2023 had been the worst start for the dollar to the year since 2018 with the interest rate forwards feeding the pullback as they price in the terminal rate for the Federal Reserve to end its most aggressive program of interest-rate increases since the 1980s.
The moves come after a combination of short covering, higher interest rates and safe haven buying. These popular macro trades tend to be risk on or risk off and feed each other, the forex moves accordingly flow into other big shorts such as bonds, U.S. tech stocks, and commodities, and European equities.
The Chinese Yuan has been particular weak with the PBoC meanwhile is trying to slow recent CNH weakness vowing to curb speculation following a drop to 7.0750, its weakest since December.
Geopolitically the landscape is constantly evolving since the Russian invasion of Ukraine, China’s Xi’s power grab and Covid lockdown protests, a move to the right in Italy and Russia’s annexation in eastern Ukraine of territories, after taking Crimea in 2014 and a divisive election in Brazil and the US deepening partisan divide.
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From The TradersCommunity Research Desk