Volatility in the currency markets was extreme this week with the dollar index having its biggest one-day decline since March 2020 Friday, the DXY dropping 1.6% Friday in an extremely overcrowded trade. The move reversed a huge move higher earlier in the week following Chairman Powell’s comments at the FOMC press conference. A shift in interest rates forward projections spurred the sell off after Fed Speak from Collins and Evans. The Chinese Renminbi had its best day “in decades’ jumping 1.62%, the Offshore Renminbi ripped 2.02% versus the dollar.
Forex Weekly Analysis and Outlook – US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate.
Geopolitically the landscape is changing fast, a move to the right in Italy, the rapid referendums and Russia’s annexation in eastern Ukraine of territories, after taking Crimea in 2014 and a divisive election in Brazil. a new phase in the conflict.
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.
The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact. The dollar is 13% higher this year against other major currencies
Weekly Recap and Outlook
How Foreign Exchange Prices Finished November 4, 2022
- For the week, the U.S. Dollar Index little changed at 110.88 (up 15.9% y-t-d). On Friday the dollar index dropped 1.6%, the biggest one-day decline since March 2020. The Chinese Renminbi jumped 1.62%, and the Offshore Renminbi surged 2.02% versus the dollar.
- For the week on the upside, the Brazilian real increased 4.7%, the New Zealand dollar 2.1%, the Mexican peso 1.4%, the South African rand 1.3%, the Australian dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.8%, the Japanese yen 0.7%, the Swedish krona 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Swiss franc 0.1%, The Chinese (onshore) renminbi increased 0.94% versus the dollar (down 11.54% y-t-d).
- On the downside, the British pound declined 2.0%, and the euro slipped 0.1%.
Central Bank Rate Watch:
Boston Fed President Collins (FOMC voter) said Friday that she supports smaller rate hikes going forward, followed by holding the fed funds rate range at a restrictive level. Chicago Fed President Evans (non-voter) said that it makes sense to shift to smaller rate hikes. The 2s10s spread saw more pressure this week, tightening by another ten basis points to -51 bps.
Another week for central bankers:
Fed Reserve’s speakers return as the FOMC comes out of blackout. Multiple regional Fed district bank Presidents will give their interpretations of the Fed’s recent actions.
Monday, Nov. 7
- ECB President Lagarde speaks to the European Commission/ECB high-level conference on the framework for a digital euro. ECB board member Panetta participates in a panel discussion at the same event.
- Fed’s Collins and Mester speak at a symposium on women in economics hosted by the Cleveland Fed. Fed’s Barkin participates in a discussion about inflation.
- Eurozone finance ministers meet in Brussels
Tuesday, Nov. 8
- Bundesbank symposium; speeches by Nagel and Enria.
- Riksbank’s Breman speaks about the global economy.
- ECB’s Wunsch gives a public lecture in Geneva entitled “Germs, War and Central Banks”
- BOE’s Mann participates in a panel at a conference on global risk, uncertainty and volatility hosted by the Swiss National Bank, Fed and BIS in Zurich
- BOE Chief Economist Pill participates in a panel at the UBS European Conference in London BOJ announces the outright purchase amount of government securities
Wednesday, Nov. 9
- Poland rate decision: Expected to keep base rate unchanged at 6.75%.
- New York Fed President John Williams speaks at a conference on global risk, uncertainty and volatility jointly hosted by the Swiss National Bank, Fed and BIS in Zurich
- Fed’s Barkin speaks about the economic outlook at the Shenandoah University School of Business in Winchester, Virginia
- RBA Deputy Governor Michele Bullock speaks at the 2022 ABE Annual Dinner in Sydney
- ECB’s Elderson participates in a panel at an event organized by Euro-Mediterranean Economists Association
- Norges Bank and Riksbank release their respective financial stability reports
- BOE’s Haskel speaks at a Digital Futures at Work Research Centre event titled “Restarting the Future: How to Fix the Intangible Economy”
Thursday, Nov. 10
- Mexico rate decision: Expected to raise the overnight rate by 75bps to 10.00%
- Dallas Fed President Logan and Kansas City Fed President George speak at an energy and economy conference jointly hosted by their banks Cleveland Fed President Mester speaks about the outlook for the economy and monetary policy at a virtual event hosted by Princeton University
- BOE Deputy Governor Ramsden participates in a panel at the Next STEP Global Conference 2022 hosted by PIIE and National University of Singapore’s Lee Kuan Yew School of Public Policy in Singapore
- BOE’s Tenreyro delivers a keynote speech at the Society of Professional Economists Annual Conference in London
- SNB’s Maechler delivers keynote speech at the 17th Annual Meeting of SFI in Zurich
- ECB’s Schnabel, Kažimír and Vasle speak at an event in Ljubljana, Slovenia. Schnabel also participates in a roundtable discussion at the Bank of Slovenia ECB publishes its Economic Bulletin
- RBNZ releases a review of monetary policy implementation United Nations publishes its “Food Outlook” report
Friday, Nov. 11
- ECB’s Panetta delivers a talk at the Italian Institute for International Political Studies in Milan ECB’s de Guindos, Pablo Hernández de Cos and Centeno speak at XXVII Encuentro de Economía en S’Agaró
- ECB’s Holzmann speaks to journalists at the Club of Economic Writers in Vienna
- ECB Chief Economist Lane participates in a policy panel at the 23rd Jacques Polak Annual Research Conference in Washington
The Strong US Dollar Effect on US Economy and Rates
The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.
The survey of 40 economists was conducted Oct. 21-26.
- 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
- 38% said the policy makers would be forced to cut rates earlier than expected and
- 18% said the Fed would not be able to raise rates as much as planned.
- Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.
The Fed as expected raised another 75 basis-points Wednesday. Their last forecast showed rates reaching 4.4% by year end from a current target range of 3% to 3.25% and to 4.6% in 2023. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.
“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”Anna Wong (Bloomberg chief US economist)
Key Central Bank Decisions, Reports
- Bank of England Raises Interest Rates 75bps to 3% in Biggest Rise in 30 Years
- Norway Raised Interest Rate by 25bps, Norwegian Crown Fell Against Euro
- Markets Reverse Sharply on Feds Powell Statements, What Does it all Mean?
- Federal Reserve Again Raises Rates 75bps as Expected, Hints at Possibly Smaller Hikes
- RBA Raises Rates to Nine Year High 2.85%
- Japan Spent ¥6.35 trillion in October on Intervention to Support the Yen
- ECB Raises Rates Another 75 bps as Expected TLTRO Terms and Conditions Recalibrated
- Bank of Canada Raises Rates 50 Basis Point to Highest Level Since 2008
- Turkey Central Bank Shocks with 150bp Cut Accelerating Turkish Lira Free Fall
- Bank Indonesia Raised Rates by Another 50 basis points to 4.75% to Tame Inflation
- Federal Reserve Beige Book Highlights Employment Strength as Price Increases Generally Moderate
- Bank of Korea Raise Rates Again To 3.00% as US Dollar Batters Won and Yen
- RBA says Financial Stability Risks Have Increased Globally
- Reserve Bank of New Zealand Raise Rates by 50bp, as Expected
- Consumer Prices in South Korea Eased Taking Pressure off Bank of Korea
- Banco de México Raised Rates for 11th Straight Time to Record 9.25%
- Ahead of RBI Meeting S&P says Indian Inflation Likely Above RBI’s 2022 Upper Tolerance Limit
- Cable Pounded Again After Indecisive Bank of England Statement
- Japan Intervened to Support Yen for First Time Since 1998 After BOJ Decision
- Swiss National Bank Raises Policy Rate by 75 bps to 0.50%, Swiss Franc Falls sharply
- Philippines Central Bank Raised Rates by 50 basis points to 4.25%, Moves to Support Peso
- Bank of Japan Monetary Policy Unchanged Sending Yen to a Fresh 24-Year Low
- Brazil Central Bank Pauses Rates at 13.75%, after Inflation Eased Below 10%
- Sweden’s Riksbank Raise Rates by Unprecedented 100 bps
The dollar has come back with a vengeance after falling the first few weeks of August to be hitting 37-year highs on the Pound, 24-year highs on the Yen and significant levels such as parity on the Euro and over 7 against the Yuan. In the emerging markets the moves have been even more dramatic.
What we focused on in the fundamental backdrop was the selloff in the euro and yen was linked to soaring natural gas prices and the threat that Russian supplies might be cut off altogether hitting big energy importers and machinery exporters, Japan and Germany hard. German gas giant Uniper SE saw the government come to the rescue with bailout package of over 9 billion euros and an eventual privatization.
The surge in interest rates and the de-risking of the world is one factor but there are other particular influences. With regards to volatility in currency markets, these huge moves act like rubber bands when its crowded. The more stretched an exchange rate is, the bigger, faster and more painful the eventual correction. What is the catalyst? There is the obvious, a peace deal in Ukraine or a dovish Fed, which after Chairman Powell’s speech at Jakson Hole that appears to need a dramatic change.
“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Jerome Powell’s Jackson Hole speech
However, it is usually something not expected that creates major shifts
The reality is the recovery from the pandemic is not yet complete and we have the specter of a US recession darkening the scene. The strong dollar adds to the pressure to tighten as weak currencies exacerbate imported inflation.
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.”
US Yield Watch:
U.S. Treasuries retreated on Friday, snapping their three-day streak of gains. This week’s action put renewed pressure on the 2s10s spread, compressing it by eleven basis points to -41 bps. The Wall Street Journal’s Fed insider said that the central bank is unlikely to deviate from its plan to announce another 75-bps rate hike on November 2 while Blackrock expects that the November statement will include “pivot language” that will signal a less aggressive path going forward.
- 2-yr: -5 bps to 4.67% (+25 bps for the week)
- 3-yr: -7 bps to 4.57% (+16 bps for the week)
- 5-yr: -2 bps to 4.33% (+14 bps for the week)
- 10-yr: +3 bps to 4.16% (+15 bps for the week)
- 30-yr: +9 bps to 4.25% (+12 bps for the week)
Highlights – European Bonds last week
- Greek 10-year yields jumped 23 bps to 4.71% (up 339bps y-t-d).
- Italian yields surged 29 bps to 4.46% (up 329bps).
- Spain’s 10-year yields rose 20 bps to 3.35% (up 279bps).
- German bund yields jumped 19 bps to 2.30% (up 247bps).
- French yields rose 22 bps to 2.83% (up 263bps).
- The French to German 10-year bond spread widened about three to 53 bps.
- U.K. 10-year gilt yields increased six bps to 3.54% (up 257bps).
Highlights – Asian Bonds last week
- Japanese 10-year “JGB” yields added a basis point to 0.26% (up 19bps y-t-d).
Euro – EURUSD
EURUSD recovered and held back over the initial median line following the throwover to the 20-year low at $0.9535 stalling above the 61.8% retracement objective of the move since September 20 ~$0.9890 where it spat the Tenkan. A break of $0.9650 would signal a return to the lows (under initial Chunnel). Parity is a key cap now.
EURUSD has been submerged since June 2021 from a high of 1.2280. Support comes from a cluster of old lows around the 0.9600, then -1/8. Euro continues to cascade in what seems like eternal flags in the channel as it spits the Tenkan. We watch if Kijun (pink) reflecting Tenkan (orange) creates any impulse as EURUSD develops in the channel. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility
Keep in mind recoveries have 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 Euro’s attempts to rally have disappointed all year and have been impacted by surging inflation. Record-breaking natural gas prices have plunged Europe into a crisis with energy rationing this winter. In Germany, the cost of imports relative to exports has jumped to levels last seen in the 1980s. The weak euro in turn exacerbates a surge in energy costs. The EURUSD has depreciated over 12% since the start of the year and is currently trading below parity.
“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.”
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.
Bloomberg reported Goldman Sachs Group Inc strategists see the euro falling to $0.95 in the event of a deeper and more prolonged cut to gas flows. A prolonged adjustment to the region’s terms-of-trade is not yet in the euro’s price, according to Karen Fishman, strategist at Goldman Sachs. The currency is trading at levels that are in line with the investment bank’s base case scenario of a mild euro-area recession later this year.
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.
In a nutshell the Euro have been undermined by crisis after crisis, the energy crisis is devastating Germany in particular. German reports like trade, GDP and the Ifo business climate underscore who difficult the situation is. The Ukraine war and Russia threats with Nord stream 1 pipeline continue to cruel growth prospects.
Another headwind is the higher energy prices and supply disruptions stemming from the war to depress growth in Europe. Any kind of weakening demand in China for European goods could also weigh heavily on the region.
“The European Central Bank is determined to nip ‘in the bud’ any fragmentation in borrowing costs between eurozone countries, its president Christine Lagarde said…, warning anyone doubting this was ‘making a big mistake’. Appearing before EU lawmakers in Brussels, Lagarde defended the ECB’s decision, made at an emergency meeting last week, to accelerate work on a new policy tool to counter a recent surge in the borrowing costs of more vulnerable countries. ‘You have to kill it in the bud,’ the ECB president said… ‘Fragmentation will be addressed if the risk of it arises; and it will be done so with the appropriate instruments, with the adequate flexibility; it will be effective; it will be proportionate; it will be within our mandate and anybody who doubts that determination will be making a big mistake.’”June 20 – Financial Times (Martin Arnold)
British Pound – GBPUSD
British pound continues to have difficulty since it’s vicious move down in July that reversed to unchanged by the end of the month. Cable lost all of the steam from its biggest weekly gain since December 2020 against the dollar to above $1.26 to be smashed to the bottom channel under -1/8 and 1.1500 after retesting the channel and Tenkan.
Cable’s Chikou incredibly closed balanced at week’s end. 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 ABS and MM
The pound against the dollar GBPUSD traded in a wide range last month. It fell to its lowest level since the end of Bretton Woods, reaching $1.0350. The BOE’s measures to address the threat to systemic stability helped spur a short-covering rally in sterling that lifted to a high at the end of the week of about $1.1235. The move met a technical retracement objective ~61.8% of the leg lower that began on September 13 from almost $1.1740. Sterling needs to overcome resistance in the $1.1275-$1.1300 area to signal a deeper recovery, a loss of $1.09 could see $1.0750-$1.0800.
It seems our jibe of cable parity is now doing the rounds becomes closer to fact from fiction. To stop the rout of sterling there is active talk of the Bank of England doing an emergency interest rate rise to defend the currency. This would come just days after the Bank of England MPC at its September meeting Thursday raised the key bank rate by 50 bps from 1.75% to 2.25%, as expected. of note from the MPC statement; “Since August, wholesale gas prices have been highly volatile, and there have been large moves in financial markets, including a sharp increase in government bond yields globally. Sterling has depreciated materially over the period.”
Money market wagers imply that the UK’s key rate will peak at over 5.5% in the second half of 2023. Three BOE officials who pushed for a bigger, 75 basis-point hike, argued that incoming fiscal support would stoke further price pressures on Thursday Bloomberg reported.
Euro Pound – EURGBP
EURGBP after being in the doldrums saw a massive reversal after exploding higher off 8/8. The energy from when it back tested 50wma and cloud which broke and advanced significantly through the top of the channel and immediate level of resistance over 0.8900 to 93.00 and back. EURGBP support under Kijun with Tenkan.
The yen has been the worst performing major currency in 2022, sliding against the US dollar though it has corrected some in recent weeks. Relative to a basket of trading partner currencies and adjusted for inflation, the yen fell to levels last seen before the 1985 Plaza Accord.
Asian currencies have had a dismal year. The Japanese Yen and South Korean won have been falling sharply lower in 2022. The won has weakened more than 8% this year, following an 8.6% drop in 2021, which was the fastest annual fall since 2008. The Won fell below the much talked about psychological threshold of 1,300 per U.S. dollar for the first time in 13 years
Also 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
Intervention doesn’t always work, it’s a matter of timing and teamwork. Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said. Following the FOMC meeting the Yen was the strongest currency in the rebound.
“Japan’s currency interventions have been stealth operations in order to maximise the effects of its forays into the market, Finance Minister Shunichi Suzuki said…, after the government spent a record $43 billion supporting the yen last month. Bank of Japan Governor Haruhiko Kuroda, however, reiterated the central bank’s resolve to keep interest rates ultra-low, indicating that the yen’s broad downtrend could continue… ‘There are times when we announce intervention right after we do it and there are times when we don’t,’ Suzuki told a news conference… ‘We are doing this to maximise effects to smooth sharp currency fluctuations.’ The finance minister repeated his warning that authorities are closely watching market moves and will not tolerate ‘excessive currency moves driven by speculative trading’.”November 1 – Reuters (Tetsushi Kajimoto and Leika Kihara):
“Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki)
The yen on track for its worst year on record falling to 144.99 per dollar, a 24 year low, fueled by the selloff in Treasuries widening the yield gap between the US and Japan.
The BoJ has said Japan’s cyclical position with low core inflation and a more limited rebound in economic output warrants an easier monetary policy stance compared with its G10 peers. A strengthening dollar also tends to weigh heavily on emerging markets currencies, a rising dollar makes dollar-denominated debt more expensive for emerging nations to repay. The Bank of Japan chief Kuroda speaking at the G7 said BOJ will patiently continue with powerful easing announcing no change to monetary policy.
A former top Japanese currency official said that the yen could weaken to 150 per dollar due to a deepening divergence in monetary policy. Veteran economist Jim O’Neill said “The yen’s slide may spark turmoil on the scale of the 1997 Asian Financial Crisis if it declines as far as 150 per dollar”
The USDJPY power move has been 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. This move 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 is the 1998 peak at 147.65. Key support is the Tenkan and 8/8.
On the way up the price accelerated after the close above the Tenkan over 114 hence the pull for it to correct to the Tenkan which it did to ignite this rally a month ago. 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.
USDJPY spat 8/8 with a 151.94 high back to the Tenkan. Chikou rebalanced on the 600-pip move. Support is recent highs and the tenkan below that the rectangle confluence. Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.
An impulsive leg came from The Bank of Japan reinforcing 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.
A slump of that to 150 may convince China to intervene in the currency market to protect its own flagging economy and it would be perfectly rational for it to do so, former Chief currency economist at Goldman Sachs Jim O’Neill said:
‘If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,’ ‘China would not want this devaluing of currencies to threaten their economy.’”
- 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
The USDCNH spat +2/8, to test the April Highs and recalculated. It did not have the impulse power of USDJPY, until Friday. The Chinese Renminbi had its best day “in decades’ jumping 1.62%, the Offshore Renminbi ripped 2.02% versus the dollar. Resistance is MM levels support the Tenkan and 8/8 for now. China’s renminbi 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
China’s Yuan, Japanese Yen, the British Pound and the Euro have seen significant moves given their geopolitical dynamics.
“After a months-long effort to prop up the yuan, the People’s Bank of China has cycled through most of its policy tools, leaving it with some tough choices. As the currency hovers near the weak end of a daily 2% trading band against the dollar, the specter of extreme measures — however unlikely — is growing. Already, there are signs that China is intervening in foreign-exchange markets, like Japan has done. A one-time revaluation and restricting the yuan’s range are other major tools.”October 27 – Bloomberg:
The currency hasn’t been this close to the weak end of the fixing band, which limits the exchange rate’s moves by 2% on either side, since the People’s Bank of China devalued the yuan in 2015. We are in a seventh month of losses with its real estate crisis overhanging.
During July the PBOC cut the 5-year loan prime rate to 4.45% from 4.6% to boost the economy and cut short term rates further this past week. Beijing has 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.
On Aug. 19, the central bank also signaled its preference for a weaker yuan by setting its daily midpoint fix for onshore trading at more than 6.80 against the dollar. This was the first time it had crossed that level in 23 months. The PBOC allows the currency to trade within a daily range of 2% up or down against the dollar from its target level. The market is asking where the upper band is now?
We are heading into a weeklong holiday in China during the first week of October and reports suggest the CCP put banks on notice that they should be prepared for intervention.
“China’s central bank stepped up its defense of the falling yuan with a strongly-worded statement to warn against speculation, after the currency dropped to its lowest versus the dollar since 2008. ‘Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term,’ the People’s Bank of China said… Key market participants need to ‘voluntarily safeguard the stability of the market and be firm when they need to iron out big rallies or declines in the exchange rate.’ The central bank added that it has ‘plenty of experience’ to fend off external shocks and effectively guide market expectations.” September 28 – Bloomberg
The forward margin between the Yuan and the USD has widened as the PBoC’s rate cuts have been made it less attractive to hold the yuan against the dollar because the U.S. Federal Reserve has gone in the opposite direction.
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.”
China Foreign Exchange Trading System
While the yuan has tumbled about 8% versus the USD this year, it has strengthened against the currencies of major China’s export rivals such as Japan and South Korea. The yuan’s trade-weighted basket is just about where it was at the end of December.
The Fed’s tightening cycle has triggered a widespread selloff in Asian currencies this year, including more than 10% declines for the Japanese yen and the Korean won. China’s central bank last let the yuan depreciate past 7 to the dollar in August 2019, during the trade war between Beijing and Washington.
The yuan however has held up better against other currencies this year. China Foreign Exchange Trading System, an arm of the central bank, measures the performance of the currency against a basket of 24 currencies, including the dollar, yen and euro and lesser-traded currencies such as Polish zloty and Russian ruble the WSJ reported. That yuan index was roughly at the same level it was at the start of 2022, according to the most recent data published on Aug. 19.
Australian Dollar – AUDUSD
The AUDUSD bounced from sphere of influence with some help from a rebound in iron ore prices. The Aussie it had been dropping since it reversed off an eight-week high, trading over US71¢ with the revitalized hawkish Fed. We cautioned that The Reserve Bank of Australia has hammered on stagnant wage growth as a problem within the Australian economy. In June, the government raised the minimum wage by 5.2%. Keep an eye on the effect on bonds and the dollar here. In essence at this time, it is all about the USD.
To reflect potential upside, we look at the way down AUDUSD with cloud, Kijun and channel confluence over $0.6760 with 4/8 and 50% is now the pivotal resistance. This week we closed under the channel. Since completing a 5 at the psychological 80 level it had fallen & corrected under the weekly cloud in emotive fashion. Overcoming the $0.6575-$0.6600 area now would lift the tone.
China lockdown fears overhang and AUDUSD forwards support with bonds and RBA raising. Support is the Murrey Math Levels. Resistance the Cloud and Kijun like many commodities. It was the strongest major currency against the USD in July after the Yen correction so keep an eye on the basket should a bounce come into affect.
New Zealand Dollar – NZDUSD
The Kiwi bounced off its sphere of influence at -1/8 after it hit a two year low with the dollar soaring. On the way down it has outrun the Aussie lower this week after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there. Once NZDUSD broke the yearly low (0.6061) after failing to test the June high (0.6576) the flood gates opened. The Kiwi is tracking the negative slope amid the string of failed attempts to push back to the Kijun resistance. Note the power dump at 1/8 and well under the old 61.8% break closing under .5600. The RBNZ terminal rate is seen closer to 5.25% in early Q3 23.
Canadian Dollar – USDCAD
The USDCAD closed back under 1.3500 on the strong job numbers and shift in the Canadian/US rate curve after making a new two-and-a-half-year high a month ago. The psychological level at the 61.6 fib at 1.3659 at 4/8 confluence gave way. The USDCAD held the Tenkan led by the AUD and NZD as it spat 5/8 and the previous break. Watch flat Kijun and Tenkan. Use Fibs for support and resistance. Eyes are on Canadian CPI, the recent decline in energy prices should help alleviate some of the broader pricing pressures.
Emerging Market Currencies
Key EM currencies suffered additional losses this past month
Since the depths of July, we saw a dramatic squeeze. Emerging and developing nations’ foreign reserves have shrunk by $379 billion this year through June, according to data from the International Monetary Fund. Excluding the effects of exchange-rate fluctuations and the large foreign-exchange holdings of China and Gulf oil exporters, emerging markets are seeing the biggest drawdowns since 2008 according to JPMorgan Chase & Co.
The Run-on EM markets is unleashing a dangerous dynamic. 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.
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 Mexican Peso held its triple bottom to rally back to the Tenkan as rates rose in the US. It continues in the long sideways pattern and consolidates despite outside uncertainty from oil and high rates. The recent high near 19.5 per USD was the highest level since March of 2020 and tracked general strength in Latin American currencies which has since reversed. Use the Gann octave and the extension fibs to help measure the noise.
Turkish Lire USDTRY
The Turkish Lira slow decline continued after the recent with another surprise 150 bps rate cut in Turkey. USDTRY rides the median in the corrective channel tier spitting 17 against the dollar. We broke the all-time Lira low of 18.4 hit in December. Turkey’s recent monetary policy decisions have not been based on economic fundamentals, with since late 2021 seeing a cumulative 850bps cut in rates in a matter of months to current levels.
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.”
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.
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From The TradersCommunity Research Desk