US Dollar Marches on in Asia

The US Dollar marches on supreme today again Asia FX and G10 currencies, as both the USD Index (DXY) and US 10 Year yields hit new highs.

There seems to be a global competition on as to who can be the ugliest horse in the glue factory against the USD at the moment. The USD receiving another adrenaline shot from Federal Reserve Governor Janet Yellen overnight telling us a rate hike was “very close.” Following on from sparkling US data the Trump-

The USD receiving another adrenaline shot from Federal Reserve Governor Janet Yellen overnight telling us a rate hike was “very close.” Following on from sparkling US data the Trump-onomics freight train rolled into Asia with a new lease of life today. US 10 year yields made new highs above 2.33%, the USD Index (DXY) marched on above 101.30 and emerging Asian FX (with those pesky USD pseudo pegs) again saw selling via the offshore NDF market. USD/CNH is also trading above  6.9100 as I write and EUR/USD is below 1.0600.

The momentum still appears to be with the aforementioned freight train, and one suspects it is not yet time to stand in front of it. One word of caution, though. The world seems to have overlooked a salient point made by Ms Yellen last night. That is they won’t adjust the trajectory of their rate hike models until they have more CLARITY of policies from the new administration. I am glad Ms Yellen and I agree on something at long last.

For the record let me state again, this entire move had been predicated on Mr Trump’s acceptance speech suggesting reflation Reaganomics-style. He has yet to appoint a cabinet in totality, and we have yet to receive any seriously concrete policy intentions from him or Congress for his first 100 days. I think it was another Fed Governor in times past who infamously quoted “irrational exuberance.” Climbing off my soapbox now.

Perhaps the most surprising to me is how well equities in developed markets are holding up as bond yields continue to soar. Particularly in the United States. Assuming that US Rates have bottomed and that the price of capital is finally (not soon enough) going to be greater than 0% then eventually bond yields or equities are going to have to re-balance to the new world norm. This is supported by the action in Asia emerging markets, where the offshore NDF market has been under aggressive downward pressure this week against the USD. Here the rotation out of EMFX to higher USD yields has been happening in earnest. Prompting intervention from both Malaysia and Indonesia today and veiled threats from the Malaysian Central Bank about currency manipulators.

It is important to remember that when you peg your currency against the USD you are effectively also importing US monetary policy. Quid pro quo all is fine and dandy when the USA is running zero percent interest rates and quantitative easing. The story gets a bit more complicated when rates start rising as you are effectively tightening monetary policy by maintaining a USD peg. This puts downward pressure on your currency forcing one to sell hard currency reserves to defend it. Or you raise interest rates, or you let the peg go. None of this is a very desirable. Burn through reserves, hike rates into a soft economic situation, let the peg go leading to higher funding costs and inflation taking us back to step two. You get the picture.

Most Asian central banks seem to be taking a measured approach by  smoothing the moves through tactical intervention and letting their onshore FX rates slip against the USD. How Mr. Trump will see this in 2017 probably explains the pace of the rotation out of emerging markets at the moment US yield moves aside.

G10 FX

Coming back to my earlier ugliest horse in the glue factory comment above. There are a few candidates today.

EUR/USD

With the US 10 Year/ Bund 10 Year yield differential blowing to over 200 basis points it should be no surprise EUR remains under pressure.

1.0600 cracked fairly easily this morning with 1.0525, the Dec 2015 lows, next support. Resistance is at 1.0715.

USD/JPY

Another day another big figure. USD/JPY traded above 110.90 as the DXY made highs before falling on Japanese rhetoric. With the yield differential at over 230 basis points the dips have been shallow. Resistance is at 111.00 and  111.50 initially.

AUD/USD

Testing hourly support at 0.7380 as we speak. Receiving a double whammy from falling commodity prices overnight and soft data. Resistance is at 0.7420.

NZD/USD

The street is still digesting the economic effects of Mondays 7.8 earthquake. What it for sure is that trunk line transport links in the South Island will have to be rebuilt from scratch in places and Wellington has an indeterminate amount of damage to the CBD. GDP will definitely be negatively effected in the short term. Yield differentials will play their part here with NZ rates now on hold lower for longer against surging US ones.

The NZD has broken daily support at 0.7030 and the 200-day moving average at 0.7015, these become resistance. Support lies at 0.6950 initially.

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