US stimulus weighs on US dollar

The dollar wilts before the US stimulus trade

The dollar index remained almost unchanged at 90.45 overnight, with much of the dollar’s retreat seen amongst the commodity-bloc currencies as opposed to the euro and sterling. The Australian, New Zealand and Canadian dollars all posting gains of around 0.70% with the yen another notable gainer, with USD/JPY falling 0.35% to 103.55.

The US dollar retreated against the major currencies has become more broad-based this morning with the euro and sterling rising 0.25% to 1.2130 and 1.3680 respectively. That still leaves the single currency in range-trading no man’s land, but sterling is now threatening significant resistance at 1.3700. A rise through 1.3700 signalling a potential test of 1.4000. USD/JPY is threatening support at 103.50 as the Bank of Japan left policy unchanged this morning. A move through 103.50 signalling a potential drop to 102.50.

The commodity-bloc Australian and New Zealand dollars have continued their rallies this morning. The technical picture is suggesting that their downward correction has now run its course for the meantime. AUD/USD has risen by 0.40% to 0.7780 and a move through resistance at 0.7820 signals a test of 0.8000. NZD/USD has risen 0.55% to 0.7210 this morning with resistance at 0.7220 and 0.7315. USD/CAD had fallen 0.20% to 1.2613 today, clearing support at 1.2620 and initially signalling further losses to the 1.2520 area.

Asian currencies rallied strongly overnight with their high beta to the global recovery and trade, both of which are expected to improve under President Biden. Except for the Malaysian ringgit, Asian currencies are only slightly higher this morning, with local markets content to consolidate gains made overnight. USD/MYR is now 0.35% lower at 4.0290 as I write, boosted by the stimulus trade and an unchanged Bank Negara yesterday. It has cleared support at 4.0330 and could well outperform over the next few days, potentially testing 4.0000.

Overall, the US dollar weakness has been somewhat uneven with currencies more closely linked to a global recovery outperforming, notably versus European ones. Nevertheless, momentum has clearly swung against the US dollar, and it seems likely that the US dollar short squeeze will take a hiatus for now. It may reappear if the Senate Republicans dish out a harsh dose of political reality to the Biden administration.

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