Currency markets calm as US dollar takes a breather
The US dollar index continues to bounce around between 90.50 and 91.00, implying that currency markets are content to consolidate while awaiting more directional clarity to appear, mostly from Washington DC. The dollar index finished mid-range at 90.70 overnight and is almost unchanged in Asia.
EUR/USD eased back from 1.2080, which has capped gains for the past week, to 1.2150 overnight, where it remains in Asia this morning. A daily close above 1.2200, or below 1.2100, will give markets their next indication of direction. GBP/USD continues to be at the mercy of Brexit developments, after gapping higher yesterday as talks were extended past Sunday’s deadline. The markets have priced in a deal being reached, but there is certainly a significant downside risk that the talks could in end failure. This makes the pound quite vulnerable to fluctuations. Sterling rose to 1.3350 overnight in another choppy session, where it too, remains in Asia this morning. I expect sterling to trade noisily in a 1.3200 to 1.3500 range until we have some clarity, one way or the other. Once that occurs, GBP/USD will either rise to near 1.3800 or drop to 1.2500.
The Australian and New Zealand dollars have both given up some of their recent gains, with AUD/USD falling 0.25% to 0.7515 today on iron ore falls and China trade nerves. As proxies to the global recovery, both Australasians are merely consolidating gains before their next legs higher.
The story is much the same with Asian regional currencies. At 6.550 today, USD/CNY remains not far off its recent lows near 6.5200. As long as the CNY remains firm, and of that, I have no doubt, Asian regional currencies will continue to follow in its slipstream. Asia should outperform in 2021 as the Covid-19 recovery gathers pace, and with rates at zero in the G-10 world, will continue to ratchet higher into the year-end and the new year.
