Forex Weekly Outlook – The US Dollar Back Near Twenty Year Highs Against Yen

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.

The higher dollar is impacting US exporters who are unhedged. Microsoft warned this week, lowering their expectations for earnings and revenues because of negative impacts from a higher dollar. The US dollar surged against the yen after selling off earlier in the week to be in striking distance of 20-year highs for the USDJPY in May at 131.342. Risk off sentiment returned at week’s end which saw currencies pullback from the dollar. We have a number of Central Banks Monetary Policy decisions this week which will affect rates and risk moods.

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

The U.S. Dollar Index gained 0.5% to 102.14 (up 6.8% y-t-d).

Majors:

  • For the week on the upside, the Canadian dollar 1.0%, the Australian dollar 0.6%
  • On the downside, the Japanese yen declined 2.9%, the British pound 1.1%, the Swiss franc 0.6%, and the euro 0.2%.

Minors

  • For the week on the upside, the South Korean won increased 1.1%, the Swedish krona 0.4%, the Norwegian krone 0.3%, the South African rand 0.3%, Mexican peso 0.1%, Chinese (onshore) renminbi increased 0.59% versus the dollar (down 4.57% y-t-d)
  • On the downside the Brazilian real 0.9%, the Singapore dollar 0.5%, the New Zealand dollar 0.3%

US Yield Watch:

U.S. Treasuries 2s10s spread remained at 28 bps. However, the 2s30s spread tightened by five basis points to 43 bps due to outperformance in the long bond.

  • 2-yr: +5 bps to 2.68% (+22 bps for the week)
  • 3-yr: +6 bps to 2.88% (+24 bps for the week)
  • 5-yr: +4 bps to 2.95% (+22 bps for the week)
  • 10-yr: +4 bps to 2.96% (+22 bps for the week)
  • 30-yr: +4 bps to 3.11% (+14 bps for the week)

Highlights – European Bonds

  • 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 EURUSD reversal off the bottom outer channel, the lowest closing rate since 2017 three weeks ago ran into the weekly Tenkan. It spat from the cycle high at 1.07857 Monday. Risk this week focuses on CPI reports and an ECB meeting.

Euro continues to correct in what seems like eternal flags in the channel. We watch if Kijun (pink) testing Tenkan (orange) creates any impulse as EURUSD develops in the channel. Watch 3 waves to see development for continuation. Watch also for impulse off Chikou rebalance. Again, governed by EURGBP and Bund volatility.

British Pound – GBPUSD

British pound pulled back from its biggest weekly gain since December 2020 against the dollar to its highest in four weeks. It found support at MM 2/8 which also May 2021 1-2 test. We ran into channel and Tenkan confluence and flattening Kijun. GBPUSD closed the week near session lows at 1.2488 close to the 38.2% retracement of the move up from the May 13 low at 1.24705. The upcoming week will be heavy on UK data, which could mean an eventful week for the British pound.

Euro Pound – EURGBP

EURGBP after testing 50wma back tested to break back above a messy bill flag and to the cloud as the GBP rallied. Kijun, 50wma and clouds resistance. Over the last four weeks, EURGBP lost 0.72%. Over the last 12 months, its price fell by 1.18%.

Asia

The yen has been the worst performing major currency in 2022, sliding around 12 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.

USDJPY corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher. The USDJPY moved to the highest level since May 9 and above the May 11 high of 130.80 at 130.973. The May high of 131.342 represents 20-year highs for the USDJPY. 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.

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 fell against all the major and minor currencies this past week except against the Yuan. Weakness continued after the PBOC cut the 5-year loan prime rate to 4.45% from 4.6% to boost the economy last Friday. 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 appreciated over $0.7150, hitting its highest levels in three weeks, as strong retail sales data for April showed consumers held up well despite surging inflation, setting the stage for further increases in interest rates. 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. The Aussie rallied back over .70 heading into the weekend elections. Support is the Murrey Math Levels. Resistance also the Cloud, Tenkan and Kijun like many commodities.

New Zealand Dollar – NZDUSD

The Kiwi mirrored the AUD in its wave (iii) spit to lower channel wing. Momentum built from the cloud tap and rejected 50% Fib & 4/8 confluence. Kijun and Tenkan Resistance, which is pivotal. Support previous break spits and channel. We closed back over the old 61.8% break. Over the last four weeks, NZDUSD rose 0.69%. Over the last 12 months, its price fell by 10.82%.

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 Tenkan below 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.

Mexican Peso USDMXN

The Mexican Peso continues in the long triangle and consolidates despite outside uncertainty from oil and high rates strengthening to 19.5 per USD the highest level since March of 2020 and tracking general strength in Latin American currencies. Banxico’s last meeting where policymakers signaled those stricter measures could be implemented to curb inflation back to the bank’s target after the bank hiked interest rates by 50bps to 7%, the highest level since the start of the pandemic. Use the Gann octave and the extension fibs to help measure the noise.

Turkish Lire USDTRY

The Turkish Lira slow decline continues after the wild 18-10 USDTRY swing last year reversed after falling in 3 waves to explode over the Tenkan, weekly cloud Kijun and 50wma below. The Murrey Math and Fib targets with last year’s Lire all-time lows in a hyper inflating collapse. The Turkish lira weakened further to the top of the channel closer to that all-time low of 18.4 hit in December, after the central bank left interest rates unchanged once again this month, despite inflation and recession worries. So far this year the lira has lost nearly 23% against the greenback, making it the worst performer in emerging markets.

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

Sources: Finviz, TC

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