Improved tone lifts China-beta currencies
The US dollar rallied on Friday as investors reduced risk into the week’s end. The dollar index rose 0.12% to 90.24, having tested support in the 90.00 area earlier in the session. With its weighting to non-commodity currencies, the dollar index is drifting today. Along with the euro, sterling and yen, the dollar index is almost unchanged.
Most of the action has been in the Asian regional, and commonwealth commodity currency sectors, boosted by China overtaking the US as the number one recipient of Foreign Direct Investment (FDI). The Australian, Canadian and New Zealand dollars are all 0.20% higher versus the greenback this morning, recouping some of their risk aversion losses from Friday. Their trajectory over the week will depend mostly on the dovishness of the FOMC on Thursday Asian time.
Regional currencies are also drifting higher against the dollar on the FDI story. The yuan is up 0.15% to 6.4760, the Singapore dollar has risen 0.16% to 1.3262 with the Thai baht and Philippine peso modestly higher. The Indonesian rupiah and Malaysian ringgit have eased by 0.20% this morning, as Covid-19 fears weigh on their outlook.
Despite the FDI boosting high China beta currencies, forex markets are ranging on a quiet day. An important event to keep an eye on is this week’s FOMC meeting, with the Federal Reserve expected to leave the Fed Funds rate unchanged between 0.00% and 0.25%. Its USD120 billion per month bond, and MBS buying programme will also remain intact. The decision and press conference occur in the early hours of Thursday for Asia. Although the Fed should be comfortable with the move higher in US yields, Chairman Powell needs to squash aggressively any such taper thoughts.
Will the dollar resume its short squeeze? If obstacles emerge to the Biden stimulus, the answer is affirmative. Conversely, an ultra-dovish FOMC could see a rotation out of the dollar. For now, we remain in wait-and-see-mode.
