US dollar rally continues
Even as Wall Street recorded its best day in recent times, currency markets, rather intriguingly, diverged from the buy everything playbook. We have become programmed to expect US dollar weakness after US equity strength, but currency markets are not following the plan. The dollar index rose by 0.20% overnight and has risen by another 0.18% to 91.20 in Asia. That leaves the dollar index just shy of the 100-day moving average (DMA) at 91.28. A close above there this evening, a signal that the short-dollar squeeze might be back, this time powered by US yields.
Much of the index’s strength is down to the weakness of the euro, British pound and Japanese yen. It is unlikely the central bankers of Europe, Britain and Japan will tolerate any sustained rise in bond yields, in contrast with the messages from various Federal Reserve Governors. The potential widening of yield differentials further between the US and other developed markets is clearly weighing on forex markets more than equity ones at this stage.
All of which has left the US dollar performing strongly this morning in Asia. EUR/USD is testing support at 1.2020 today; also, its 100-DMA, potentially targeting its January lows at 1.1950 initially and potentially extending to 1.1800. The previously bullet-proof British pound is also under pressure with GBP/USD testing 1.3900. It could potentially fall to the base of its multi-month rising wedge at 1.3770. USD/JPY is approaching 107.00, but with overbought technical indicators, we could pause for breath at that level.
The commodity grouping all rallied overnight in sympathy with equity markets and a calm US bond market. That has reversed in Asia, with an unchanged RBA unwinding all of AUD/USD’s gains today. AUD/USD has eased to 0.7760, just above its rising wedge support at 0.7730. Failure opens up more losses to 0.7600 initially. The New Zealand dollar has eased by 0.20% to 0.7250 today, with critical technical support at 0.7200. Failure targets losses to 0.7000 initially. USD/CAD has risen to 1.2680 in Asian trading, not far from its trendline resistance at 1.2700, a line that goes back to March 2020. A rise through 1.2700 sets the scene for a test of 1.3900 and then 1.4000.
Asian currencies are generally on the back foot today as well in the face of US dollar strength. Notably, the Korean Won has weakened by 0.80% to 1121.50 with resistance at 1129.00. Although the region’s worst performer, the Singapore dollar, Malaysian ringgit, and Indonesian rupiah have all given ground. Notably, USD/IDR has risen above 14,300.00. USD/CNY, though, remains almost unchanged at 6.4695, which should limit fallout amongst its regional peers. Only a move by USD/CNY above 6.5000 is likely to set off a concerted bout of regional currency weakness in the near-term.
