Forex Weekly Outlook – Surging Global Bond yields and Acute Currency Market Instability Boost 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.

When markets quiver funds seek stability and this week again, we saw the sinking euro and yen fuel dollar strength. The US dollar is doing all the heavy lifting, surging against the yen blowing through 20-year highs. The EUR got no respite from a tentatively hawkish ECB. Risk off sentiment grew a leg this week.  Greek yields surged another 67 bps this week to 4.38%, a 10-session spike of 172 bps. Italian yields jumped 36 bps to 3.76% (up 167bps in 10 sessions). This had a knock-on effect of destabilizing “risk off” deleveraging across EM currencies and securities markets which fed on itself.

EM index CDS surged 38 this week to a three-month high 309 bps, the largest weekly increase since March. At the EM periphery the weakest currency of 2022 got weaker, Turkey saw its sovereign CDS spike 115 to a 19-year high 848 bps and the Turkish Lira extending a steep slide this week closer to that all-time low of 18.4 hit in December.

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.”

Weekly Recap and Outlook

For the week, the U.S. Dollar Index gained rose 0.9% to 104.18, gaining 2.0% for the week. The Index is now within a point of its high from mid-May after bouncing off its 50-day moving average (102.10) this week.

Majors:

  • For the week on the upside, Nil
  • On the downside, the Japanese yen 2.6%, the Swiss franc 2.6%, the Australian dollar 2.1%, the euro 1.9%, the Canadian dollar 1.4%, the British pound 1.4%.

Minors

  • For the week on the upside, Nil
  • On the downside the Brazilian real declined 4.3%, the Norwegian krone 2.8%, the Swedish krona 2.6%, the New Zealand dollar 2.1%, the South Korean won 2.1%, the Mexican peso 2.0%, the South African rand 2.0%, the Singapore dollar 0.9%, Chinese (onshore) renminbi declined 0.73% versus the dollar (down 5.26% y-t-d).

US Yield Watch:

U.S. Treasuries ended the week sharply lower sending yields on the 10-yr note and shorter tenors past their highs from May in response to another hotter than expected CPI report. This week’s underperformance in shorter tenors tightened the 2s10s spread by 16 bps to 12 bps.

  • 2-yr: +22 bps to 3.04% (+36 bps for the week)
  • 3-yr: +21 bps to 3.21% (+33 bps for the week)
  • 5-yr: +19 bps to 3.25% (+30 bps for the week)
  • 10-yr: +11 bps to 3.16% (+20 bps for the week)
  • 30-yr: +3 bps to 3.20% (+9 bps for the week)

Highlights – European Bonds

Greek yields surged another 67 bps this week to 4.38%, with a stunning 10-session spike of 172 bps. Italian yields jumped 36 bps to 3.76% (up 167bps in 10 sessions). Yields were up 34 bps in Spain to 2.78% (131bps) and 32 bps to 2.80% (142bps) in Portugal. Even German bund yields rose 24 bps to 1.52% (96 bps), as French yields jumped 29 bps to 2.10% (107bps).

  • Greek 10-year yields sank 23 bps to 3.48% (up 217bps y-t-d).
  • Ten-year Portuguese yields declined six bps to 2.07% (up 161bps).
  • Italian 10-year yields dropped 10 bps to 2.90% (up 173bps).
  • Spain’s 10-year yields declined four bps to 2.04% (up 148bps).
  • German bund yields added two bps to 0.96% (up 114bps).
  • French yields increased a basis point to 1.48% (up 128bps).
  • The French to German 10-year bond spread narrowed one to 52 bps.
  • U.K. 10-year gilt yields added two bps to 1.92% (up 95bps).

Europe

The Euro has recovered 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.

The euro fell as low as around $1.035 earlier this month, down from the $1.137 level at which it ended 2021. The low just over 3% 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 continued its reversal off the lowest closing rate since 2017 at the outer channel extended gains to above $1.07, the highest in four weeks after ECB President Christine Lagarde said the central bank is likely to exit negative interest rates by the end of the third quarter.

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.

Another headwind is 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.

Euro – EURUSD

The Euro reversal off last month’s lowest closing rate since 2017 at the outer channel reversed at the April break retest and spat the Tenkan after ECB President Christine Lagarde said the central bank will raise by 25% next month but still well behind the Fed. Euro continues to correct in what seems like eternal flags in the channel. 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

British Pound – GBPUSD

British pound has lost most of its steam from its biggest weekly gain since December 2020 against the dollar to above $1.26 to close to i at 1.2320 after retesting the channel and Tenkan and being repelled. It found support ahead of MM 2/8 which also May 2021 1-2 test. Above we have channel and Tenkan confluence and flattening Kijun. The upcoming week will be heavy on UK data, which could mean an eventful week for the British pound.

Euro Pound – EURGBP

EURGBP is back testing 50wma which it back tested to break back above a messy bill flag and to the cloud as the GBP failed. 50wma and clouds resistance. Kijun support with Tenkan but flat so need upturn to continue higher.

Asia

The yen has been the worst performing major currency in 2022, sliding around 14 per cent against the US dollar. Relative to a basket of trading partner currencies and adjusted for inflation, the yen has fallen to levels last seen before the 1985 Plaza Accord.

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

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

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”

USDJPY corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher. From the we accelerated higher moving above the May high of 131.342 which was 20-year highs for the USDJPY. It hasn’t let up closing the week at 3/8 134.42 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 this week. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel.

Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.

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

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

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.’”

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

The USD rose against all the major and minor currencies this past week. Yuan weakness continued after the PBOC cut the 5-year loan prime rate to 4.45% from 4.6% to boost the economy two weeks ago. CNY has been the weakest since November 5 last year, an 18-month low over 6.82, extending heavy losses sustained in April, after Beijing warned against criticism of its dynamic zero-COVID policy. The zero-tolerance approach, which depends on strictest lockdowns and mass testing, has weighed heavily on the already slowing economy and raised the need for further policy easing. We saw some retracement off 6/8 as Kijun rebalanced.

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

 Australian Dollar – AUDUSD

The Aussie dollar reversed with cloud, Kijun and channel confluence over $0.7250, its highest levels in three weeks. It closed under the Tenkan around the channel midpoint. Since completing a 5 at the psychological 80 level it had fallen & continued to correct under the weekly cloud in emotive fashion. The Australian dollar fell to a test of the lows of 0.6800 at 4/8 China lockdown fears and AUDUSD forwards before finding support. Support is the Murrey Math Levels. Resistance also the Cloud, Tenkan and Kijun like many commodities.

New Zealand Dollar – NZDUSD

The Kiwi mirrored the AUD in its wave (iii) spit to lower channel wing recover to Tenkan where it met the KOD. Momentum failed and reversed from there. Kijun and Tenkan Resistance, which is pivotal. Support previous break spits and channel. We closed back under the old 61.8% break.

Canadian Dollar – USDCAD

The Loonie has continued to benefit from the USD’s broad correction as an improving fundamental background for the CAD of strong growth, hawkish central bank, favorable terms of trade. Since the USDCAD reversed its surge over 1.30 to test the cloud below and recaptured the Tenkan led by the AUD and NZD as it spat the weekly flat-topped triangle. Higher US yields has negated much of the oil price impacting direction. Watch flat Kijun and Tenkan. Use Fibs for support and resistance.

Emerging Markets

Brazilian, Chilean, Turkish and Colombian currencies were down about 4%. The Hungarian forint fell 3.5% and the Polish zloty 2.3%.

At the EM periphery EM index CDS surged 38 this week to a three-month high 309 bps, the largest weekly increase since March. Turkey saw its sovereign CDS spike 115 to a 19-year high 848 bps. CDS prices were up 24 bps in Brazil (260), 23 bps in Mexico (153), and 43 bps in Colombia (256).

Yields surged 57 bps in Poland, 52 bps in Cyprus, 50 bps in the Czech Republic, 42 bps in Colombia, and 32 bps in South Africa.

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 has picked up speed as it broke into the next corrective channel tier falling to 17 against the dollar on Wednesday, extending a steep slide this week closer to that all-time low of 18.4 hit in December. President Recep Tayyip Erdoğan vowed once again to cut interest rates despite spiraling inflation. The Turkish president said this week 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. Turkey’s lira has lost 22% this year, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year.

Watch Central Banker and Geopolitics speeches, reports and rate moves. 

Sources: Finviz, TC

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