Exciting times in FX markets

US dollar rises as risk sentiment slides

The US dollar index rose 80 points to 91.00 at one stage overnight, as panicked investors rushed for safe-havens. However, as order was restored in New York, it retreated, finishing the day 0.10% lower at 91.04, cunningly disguising the day’s volatility. EUR/USD spiked as low as 1.2130 before rallying to finish almost unchanged at 1.2240. GBP/USD traded both sides of 1.3200 and 1.3500 in a Covid-19/Brexit induced sell-off. The UK’s fishing fig-leaf though, saw it close only 0.45% lower for the day at 1.3460. The story was much the same for AUD/USD, NZD/USD and USD/JPY, all suffering 1.0% plus sell-offs, before recovering all of those losses.

Having missed the worst of the currency market fireworks yesterday, Asia in risk aversion mode today. The dollar index has risen 0.25% to 90.25, well above critical support at 89.75. The commodity currencies have come in for particular attention as risk bellwethers. The NZD/USD has fallen 0.80% to 0.7055 in thin liquidity. The kiwi held support perfectly at 0.7000 yesterday, and any move lower should still be regarded as corrective unless we have a daily close under 0.7000. By contrast, the AUD/USD has fallen only 0.35% to 0.7560 today, well above yesterday’s panic sell-off lows at 0.7460. Support at 0.7500 should contain losses.

Asian regional currencies are all on the back foot as investors reduce exposures ahead of the holidays. USD/CNY has risen 0.10% to 6.5520. But across regional Asia, USD/SGD, USD/IDR, USD/MYR and USD/THB are all higher by between 0.25% and 0.40%. The price action looks corrective and not a structural turn in sentiment. Although I expect Asian currencies to outperform right through 2021, the next week or so may well see a choppy range-trading market.

Sterling continues to be emotional as the Brexit December 31st cut-off nears and European countries close their borders to UK travellers over the new strain of Covid-19. GBP/USD has fallen 0.50% to 1.3390 today after PM Johnson said the Brexit outlook looked negative still. The BBC reports that the UK and France have agreed on a plan to restart freight through the now Covid-closed border, which may give some support to sterling.

As previously said, sterling remains at the whims of Brexit, and now Covid-19, with a very noisy 1.3200 to 1.3500 range likely. That was pretty much how it played out yesterday and getting involved anywhere in between is likely to be hazardous to one PnL. GBP/USD has a lovely support trend-line extending back to June this year. Depending on the thickness of the line you draw on the chart, it comes in today around 1.3100, also the home of the 100-day moving average (DMA) at 1.3120. Unless GBP/USD closes under 1.3080, for charting inaccuracy sake, sterling remains in an uptrend versus the dollar. Failure likely means Brexit failure as well, in which case the chart hints that sterling’s initial target is 1.2700. You have been warned.

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