In behaviour reminiscent of equity markets overnight, the US dollar staged a full retreat as stimulus hopes out of China, and an apparent Ukraine agreement inching closer to reality saw a mass exodus out of haven positioning and into full risk-seeking mode. The dollar index fell 0.62% to 98.40 where it remains this morning. This region is also technical support, and a sustained break lower will signal a deeper correction towards 97.50.
EUR/USD rallied powerfully for much the same reasons, climbing 0.75% to 1.1035, while GBP/USD rose 0.80% to 1.3160. A hawkish BOE today could extend sterling gains above 1.3200, and if more progress is made on a Ukraine agreement, EUR/USD could well be on its way to 1.1200. I believe the single currency will struggle to maintain its gains above that level, though, as post-Ukraine, the inflation shock will continue to persist and the divergence with US monetary policy will eventually stop any structural rally.
USD/JPY continues to trade around 118.75 as markets price in a soaring energy import bill, and a widening US/Japan rate differential. With the BOJ expected to remain as dovish as they have been for the last 25 years tomorrow, upside pressure on USD/JPY should resume. AUD/USD rallied 1.35% overnight to 0.7290, rising to 0.7310 in Asia after strong labour market data. NZD/USD is 1.0% higher to 0.6835 over the past 24 hours. Both antipodeans have surfed the resurgent wave in optimism from China and Ukraine higher. The rallies only leave them in the middle of their March ranges though. Although further sentient gains are possible, both are acutely vulnerable to negative headlines hitting the news tickers as well.
China was back adding countercyclical factors today, setting a much higher than expected PBOC USD/CNY fixing at 6.3406, while also adding cash via the repo. That stopped the overnight sentiment rally by CNY and CNH in its tracks and is also going to limit gains in the Asian FX space in general. The Korean won, Indian rupee, Thai baht, Singapore dollar, and Malaysian ringgit rallied sharply overnight and have booked more gains today, riding China euphoria. As massive net importers of energy, and with little or no willingness to materially tighter monetary policy, all will struggle to maintain material gains, especially if China is guiding the yuan lower. The rally could continue for a few sessions yet, but I expect Asian currencies especially, to face serious challenges this year.
