US dollar shows broad gains
The US dollar was a notable recipient of safe-haven inflows overnight, the US dollar index jumping by 0.50%, closing on daily resistance at 93.50. Although unchanged today in Asia, the US dollar index looks poised to make further gains to 94.00 in the near-term as extended US dollar short positioning versus the majors is squeezed.
The move higher by the US dollar overnight has left G-10 currencies on very shaky ground. The EUR/USD fell to support at 1.1760, with further losses possible to 1.17000 initially. A daily close below 1.1700 implies a much deeper correction to 1.1400/1.1500 is possible. GBP/USD broke one-month support at 1.2980 on the way to 1.2955, on a double whammy of Brexit woes and a stronger dollar. Its correction could now extend to its 200-DMA at 1.2700.
USD/CAD and USD/CHF have both broken out of down-channels with pro-cyclical AUD/USD and NZD/USD both falling by 1.0% overnight. Critical support for AUD/USD and NZD/USD lies at 0.7100 and 0.6500, respectively.
Tight liquidity from the PBOC and robust China data recently continues to support the Chinese yuan, though. USD/CNY has only risen slightly to 6.8500 in the past few days. The PBOC seems determined, via a series of firm CNY fixes, to limit the fallout of the dollar correction. That has been mildly supportive for regional Asian currencies. USD/INR, USD/SGD, USD/MYR, USD/THB and USD/PHP have edged higher only modestly and have held onto most of their recent weeks’ gains. That suggests that regional investors believe the US dollar correction to be transitory.
With sentiment able to turn on a dime now, the US dollar short squeeze could end as quickly as it began. However, given the level speculative short positioning in the markets versus the G-10 majors, I suspect the dollar correction in that space still has substantial room to run. In sterling’s case, that may well be the new norm as financial markets rapidly reprice Brexit risk.
