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.
Risk on sentiment continued to improve which saw currencies gain again this week from the dollar. Rising U.S. interest rates and safe haven flows had seen the U.S. dollar soar in 2022, with rates pulling back and risk moods improve investors moved back into currencies. Rates fell as traders priced in the odds of a U.S. recession becoming more likely which had seen the U.S. Treasuries finished their third consecutive week of gains.
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.”
U.S. Treasuries finished their third consecutive week of gains. This week saw a widened the 2s10s spread by seven basis points to 28 bps, reversing half of last week’s tightening.
US Yield Watch:
- 2-yr: -2 bps to 2.46% (-12 bps for the week)
- 3-yr: +1 bp to 2.64% (-9 bps for the week)
- 5-yr: +1 bp to 2.73% (-8 bps for the week)
- 10-yr: -1 bp to 2.74% (-5 bps for the week)
- 30-yr: -2 bps to 2.97% (-3 bps for the week)
Weekly Recap and Outlook
The U.S. Dollar Index dropped 1.4% to 101.67 (up 6.3% y-t-d). It has been trading back from a nine-year high.
- For the week on the upside, Swiss franc 1.9%, the Australian dollar 1.7%, the euro 1.6%, the British pound 1.2%, the Canadian dollar 0.9% and the Japanese yen 0.6%.
- On the downside, nil
- For the week on the upside, the Brazilian real increased 3.2%, the Norwegian krone 2.9%, the New Zealand dollar 2.2%, the South African rand 1.6%, the Mexican peso 1.5%, the Swedish krona 1.3%, the South Korean won 0.9%, the Singapore dollar 0.8%
- On the downside, nil
This week we saw the Euro continue to recover after last week 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 continued its reversal off last week’s lowest closing rate since 2017at 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.
The euro fell as low as around $1.035 earlier this month, down from the $1.137 level at which it ended 2021. On Friday it traded around $1.056, just over 5% away from reaching parity with the dollar. It was all the way back in 2002 that the euro and dollar last reached parity.
Euro – EURUSD
The EURUSD reversed off the bottom outer channel closing at $1.07356, reversing the lowest closing rate since 2017 two weeks ago. 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 continued from its biggest weekly gain since December 2020 against the dollar to appreciate above $1.26 to close to its highest in four weeks. The move is on optimism that the new Cost of Living Support package will help boost consumer spending. as the latest economic data suggested the market might not need to scale back its expectations for Bank of England rate hikes much further. It found support at MM 2/8 which also May 2021 1-2 test. Above we have channel and Tenkan confluence and flattening Kijun for strength. 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%.
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 is correcting with the weakness in Treasury yields after spitting +2/8 and channel convergence at 132.00. 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.
- 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.
Sources: Finviz, TC
Live From The Pit