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.
The rise in the US dollar continues with Euro striking parity for the first time since 2002, and the strongest against the yen since 1998. The Bloomberg Dollar Spot Index hit its highest level on record, eclipsing the peak from the Covid-19 pandemic hit in March 2020, with the previous high in 2005. Trouble at the euro-zone “Periphery”, notably Italy is driving euro weakness, fear of an existential euro crisis, and resulting dollar strength. The dollar is causing systemic de-risking and deleveraging throughout the global Periphery and frontier emerging markets. Liquidation and default risks are high in areas like private equity and venture capital.
The strong dollar becomes more poignant when adjusted for inflation, the trade weighted dollar has been stronger only twice, in 2002 and 1985.
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. June losses for emerging market currencies have been dramatic and the run-on EM markets is unleashing a dangerous dynamic. EM bonds have been smashed and while key EM CDS prices jumped this week to highs since 2020.
The selloff in the euro and yen is 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 is in talks with the government over a potential bailout package of as much as 9 billion euros
The surge in interest rates and the de-risking of the world is one factor but there are other particular influences. Keep in mind as recent moves 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. However, it is usually something not expected.
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.”
Weekly Recap and Outlook
For the week the U.S. Dollar Index slipped 0.4% to 108.06 Friday, narrowing this week’s gain to 1.1%. Friday (Up 13.0% y-t-d). Bloomberg Dollar Spot Index, which tracks the greenback against a basket of developed and emerging market currencies, rose as much as 1.2% to 1304.55 Thursday. The level is above the mark it hit in March 2020, with the previous high in data stretching back to 2005.
- For the week on the upside, nil
- On the downside, the Japanese yen 1.8%, the British pound 1.5%, the euro 1.0%, the Australian dollar 0.9%, the Canadian dollar 0.7%,
- For the week on the upside, Swedish krona increased 0.2%
- On the downside, the Brazilian real declined 2.8%, the South Korean won 2.0%, the South African rand 1.2%, the Norwegian krone 1.0%, the New Zealand dollar 0.4%, the Mexican peso 0.4%, the Singapore dollar 0.1%, Chinese (onshore) renminbi declined 0.93% versus the dollar (down 5.94% y-t-d).
US Yield Watch:
U.S. Treasuries compressed the 2s10s spread by 18 bps to -20 bps, the deepest inversion since late 2000, which reflects expectations for slower growth. This was up from inversion of the 2s10s spread ending last week the week at -2 bps.
- 2-yr: +1 bp to 3.13% (+1 bp for the week)
- 3-yr: -1 bp to 3.14% (-1 bp for the week)
- 5-yr: -1 bp to 3.05% (-9 bps for the week)
- 10-yr: -3 bps to 2.93% (-17 bps for the week)
- 30-yr: -1 bp to 3.09% (-18 bps for the week)
Highlights – European Bonds
- Greek 10-year yields dropped 17 bps to 3.50% (up 218bps y-t-d).
- Ten-year Portuguese yields fell 11 bps to 2.31% (up 184bps).
- Italian 10-year yields slipped a basis point to 3.28% (up 210bps).
- Spain’s 10-year yields dropped 13 bps to 2.29% (up 173bps).
- German bund yields sank 21 bps to 1.13% (up 131bps).
- French yields dropped 13 bps to 1.75% (up 155bps).
- The French to German 10-year bond spread widened eight to 62 bps.
- U.K. 10-year gilt yields fell 14 bps to 2.09% (up 112bps).
Highlights – Asian Bonds
- Japanese 10-year “JGB” yields little changed at 0.24% (up 17bps y-t-d).
The Euro’s attempts to rally 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 Euro 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 has given 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.
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 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)
Euro – EURUSD
The Euro reversal off last month’s correction off the Tenkan has been fast and furious to the lowest closing rate since 2017 spitting the outer channel. 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 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 and 1/8 at 1.1928 after retesting the channel and Tenkan. GBP recouped some of its losses but is still undermined by political risk with PM Johnson resigning and recession fears. Sterling bounced from lows of last week to close under the Tenkan at 1.2o35. 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 back tested 50wma after breaking it last week. 50wma and cloud with Kijun support with Tenkan resistance. The EUR/GBP gave up control and weekly rally reversed three consecutive weeks.
The yen has been the worst performing major currency in 2022, sliding 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 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 on Thursday 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
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”
After USDJPY corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. Dollar yen accelerated higher moving above the May high of 131.342 which was 20-year highs for the USDJPY. It hasn’t let up with Murray Math Weekly levels recalculating higher. USDJPY closed the week just over 7/8 135.22 after spitting 136.
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.
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.’”
- 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 from there it reversed lower to 4/8 just over .68. It closed under the Tenkan around the channel midpoint. The currency got support from Australian bond prices seeing its largest weekly gain in a decade. It was the only major currency up against the USD this week.
Since completing a 5 at the psychological 80 level it had fallen & continued to correct under the weekly cloud in emotive fashion. China lockdown fears overhang and AUDUSD forwards support with bonds and RBA raising. Support is the Murrey Math Levels. Resistancethe 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 Market Currencies
An EM CDS index traded up to 395 bps intraday Thursday (up 50bps w-t-d), the high back to April 3, 2020 before ending the week up 30 to 375 bps. EM CDS hasn’t had a weekly 50 bps jump since September 2020.
De-risking/deleveraging has turned more systemic throughout the global “Periphery.”
- Indonesia CDS jumped 20 this week to 165 bps, the high since May 2020.
- Vietnam rose 21 bps to 188 bps (July ’20),
- Philippines 18 to 148 bps (March ’20),
- Malaysia nine to 112 bps (May ’20),
- India seven to 175 bps (May ’20),
- Thailand six to 73 bps (April ’20)
- South Korea six to 54 bps.
- Hungary CDS surged 48 (to 230bps)
- Romania 39 (to 347bps).
- South Africa CDS surged 31 to 369 bps (high since May 2020)
- Turkey CDS 13 surged to an almost 20-year high 883 bps.
“Frontier” markets appear to suffer acute illiquidity.
- Mongolia CDS surged 161 to 604 bps (high August ’20),
- Egypt 344 (to 1,507 bps),
- Kenya 269 (1,417 bps),
- Iraq 131 (798 bps),
- Namibia 126 (728 bps),
- Argentina 274 (1,947 bps),
- Nicaragua 91 (695 bps).
- Colombia CDS surged 45 (332 bps),
- Brazil 37 (331 bps),
- Costa Rica 31 (335 bps),
- Uruguay 30 (167 bps),
- Peru 29 (158 bps),
- Guatemala 25 (332 bps),
- Panama 25 (158 bps),
- Chile 25 (141 bps),
- Mexico 18 (196 bps).
June losses for emerging market currencies were dramatic:
- Chilean peso dropped 10.3%,
- Brazilian real 10.0%,
- Colombian peso 9.2%,
- Polish zloty 4.8%,
- South Korean won 4.7%,
- Philippine peso 4.7%,
- Argentine peso 4.0%,
- South African rand 3.9%.
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.
Ominously, CDS prices surged this week in the Philippines (53bps), Indonesia (38bps), Malaysia (38bps), and India (19bps) – trading to highs since 2020. So-called “frontier” markets are at great risk. This week’s CDS spikes included Ethiopia (588bps), Angola (136bps), Pakistan (125bps), Mongolia (96bps), El Salvador (264bps), Iraq (90bps) and Senegal (80bps) – to name a few.
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 finally found some resistance as it spat Chikou and 7/8 in the next corrective channel tier spitting 17 against the dollar. We are still in spitting distance of that all-time low of 18.4 hit in December. The background is the same with President Recep Tayyip Erdoğan vowing once again to cut interest rates despite spiraling inflation. 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. 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.
From The TradersCommunity Research Desk