The U.S. dollar gained much of its losses this week those currencies that the forward margin widened, after a heavy Central Bank week prior. There were two factors one safe haven buying which will likely become intensified with the latest’s events in Russia. The other a shift back in forwards after the dismal PMMI reports out of Europe, in particular France and Germany. In simple terms Notionnel and bund yields fell much further than Treasury yields. This also hit the commodity currencies such as the AUD and NZD. The continued again Yen fell against the crosses and dollar. The IMM COT report showed the JPY short hit a 13-mth high. Notable also the MXN long a 3-yr high while EUR selling extended to a fifth week. Overall, the dollar index (DXY) gained 0.6% to 102.90 (down 0.6% y-t-d).
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.
Over the past few weeks, the Greenback has rebounded after being down about 8.5% from a peak last September, as measured by the US Dollar index or the WSJ Dollar Index. 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.
The dollar has been oscillating lower on pricing of the end of the Fed’s tightening cycle, that has reversed over the past few weeks. The move comes 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.
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.
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.
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 have seen the USD pull back significantly from highs but the strong dollar negatively affected multinational earnings and the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said last month. Just 28% saw the currency strength as unlikely to have any impact.
Weekly Recap and Outlook
How Foreign Exchange Prices Finished June 23, 2023
- For the week, the U.S. Dollar Index gained 0.6% to 102.90 (down 0.6% y-t-d). 2022 gains were 8.2%
- For the week on the upside, the Brazilian real gained 0.8%, and the Canadian dollar increased 0.1%.
- On the downside, the South African rand declined 3.0%, the Australian dollar 2.8%, the South Korean won 2.5%, the Norwegian krone 2.4%, the New Zealand dollar 1.5%, the Japanese yen 1.3%, the Singapore dollar 1.1%, the British pound 0.8%, the Mexican peso 0.5%, the Swedish krona 0.5%, the euro 0.4%, and the Swiss franc 0.4%. The Chinese (onshore) renminbi declined 0.73% versus the dollar (down 3.91%).
Yield Watch:
Yields are one of the biggest influencings on currency prices. The bond market focus has shifted towards fundamental developments and away from monetary policy.
U.S. Treasuries retreated ahead of a three-day weekend, lifting the 2-yr yield to its highest level in more than three months while yields on longer tenors finished in the lower half of this week’s range. Treasuries began the week on the defensive with participants eyeing a flood of new supply in coming weeks and months as the Treasury works to replenish its General Account with an estimated $1 trillion of Treasury issuance as part of the latest debt-ceiling resolution. We also had tamer CPI and PPI data and The Federal Reserve left rates unchanged in a target range of 5.00-5.25% but raised the dot plot, with the median moving all the way to 5.6%,
US Yield Watch
Friday/Week
- 2-yr: -5 bps to 4.75% (+4 bps for the week)
- 3-yr: -4 bps to 4.33% (+1 bp for the week)
- 5-yr: -5 bps to 4.00% (+1 bp for the week)
- 10-yr: -6 bps to 3.74% (-3 bps for the week)
- 30-yr: -5 bps to 3.82% (-4 bps for the week)
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.”
Europe
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.
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 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
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 it’s 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.
Asia
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 until this week 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 years move. Dollar Yen was extendeded having risen in 10 of the past 12 trading sessions, one of those falls just 6 pips. A 600 pip move essentially straight up taking out last November’s high at 140.72. This week after spitting that high USDJPY fell 4 days and bounced on the fifth, Friday.
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.
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 upside moves the week after the BOJ kept rates and their yield curve control steady. The USDJPY rose 1.74%, but it is the other JPY crosses that are really on fire this week. USDJPY key support held at the the 50wma and MML’s. The move closing above the Tenkan three weeks ago powered the move.
EURJPY is up 3.51% this week and traded to the highest level since September 2008. The price moved above the swing high from May 1 at 151.61. The price has entered into the top-side extreme area that confined the pair from November 2006 to October 2008 between 151.71 and 169.968. The high Friday 155.01.
GBPJPY is up 3.76% which is the largest weekly return since September 26, 2022 when the price moved up 3.896%. Before that, you’d have to go back to the week of June 1 2022 when the pair moved up 4.26%. The price is trading at the highest-level since December 2015. Going back to October 2014 the price for the pair traded between 174.88 and 195.88.
AUDJPY is up 3.7% 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.
BOJ Intervention
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)
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 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.
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 USD sellers for now remain in control and a breach of the May low was the next key. Fundamentally, the Bank of Canada did surprise with a hike of 25 basis points last Wednesday ending their conditional pause which kept rates steady for 2 consecutive meetings.
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.
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 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 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 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. Use the Gann octave and the extension fibs to help measure the noise.
The Mexican peso remains the best-performing major currency against the USD year on year, with an 14.42 gain. 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.
Turkish Lire USDTRY
The selling of Turkey’s lira has consolidated near lows 23.60-80 after it accelerated lower last week. Last Wednesday it plunged 7.2% and touched a record low of 23.3965, bringing its losses to 20% this year. The latest Erdogan inspired turmoil saw the lira selloff the biggest since the historic crash in late 2021, after the central bank slashed rates in the face of rising inflation as part of President Tayyip Erdogan’s unorthodox policies.
Turkey’s five-year credit default swaps (CDS) added 34 basis points from the Wednesday close, breaking back above 500 to hit 516 bps, data from S&P Global Market Intelligence showed.
The lira dropped on Wednesday with a sign of authorities easing controls on the foreign-exchange market towards a freely traded currency, there are numerous regulations and measures that are yet to be rolled back. With all that, there were attempts to stabilize the currency on Thursday. Turkish central bank reserves data showed inflows of about $3 billion into deposit accounts last week from abroad, bankers said. There was some Thursday relief as the market awaits the expected appointment of a new central bank governor.
As part of the policy pivot, Erdogan is considering appointing Hafize Gaye Erkan, a U.S.-based senior finance executive, as central bank governor, Reuters reported on Monday. Investors said they are awaiting that appointment and also a potential emergency rate hike – to around 25% from the current 8.5% – ahead of the central bank’s next scheduled meeting on June 22. Erkan would be the fifth central bank chief in four years and succeed Sahap Kavcioglu, who has spearheaded Erdogan’s rate-slashing drive since 2021.
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. 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.
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. So far this year 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 is 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:
It will be a busy week for central banks with policy meeting and key data dropping. In the US, the Fed interest rate decision, inflation rate, retail sales, and Michigan consumer sentiment. We also get policy decisions from the European Central Bank and Bank of Japan monetary policy meetings. The central banks of Hong Kong and Taiwan will also have rate setting meetings.
For a Complete Central Bank Overview Visit TC Central Bank Watch:
For a Complete Macro and Micro Market Overview Visit TC Traders Market Weekly
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From The TradersCommunity Research Desk