US dollar pummelled

Surge in risk sentiment sends US dollar reeling

The US dollar wilted overnight before the onslaught of bullish risk sentiment that swept Wall Street after Friday’s Non-Farm Payrolls and the overnight ISM Non-Manufacturing PMI data. The dollar index fell 0.47% to 92.57, although it has recovered slightly in Asia to 92.68. Notably, despite the robust ISM data and aggressive equity rally, US yields drifted lower, undermining US dollar support. The fall overnight leaves the dollar index not far from its 92.50 pivot point, and a daily close below that suggests a deeper retracement to 92.00 initially.

The majors rallied overnight, but the story was as much a weak US dollar one than the dawn of a new day for the likes of the euro and yen. EUR/USD rose 0.44% to 1.1810, and if it closes above 1.1800 this evening, further gains are possible. Euro sentiment, though, will remain clouded by its Covid-19 situation and the potential Ukraine flashpoint.

USD/JPY fell 0.44% to support at 110.00 overnight but has rallied to 110.40 this morning, suggesting the US/Japan yield differential remains appealing to Japanese investors on USD/JPY dips. The 309-year JGB auction today could also be weighing on the yen. If the bid-to-cover ratio is much weaker than the previous 2.766, more yen weakness may occur.

The risk-sensitive Australian and New Zealand dollars powered higher overnight, rising to 0.7650 and 0.7060, respectively. Both, however, have retreated by 0.20% today, unwinding many of those gains, as Asian equity markets refused to buy into the overnight Wall Street rally. Taken in context, the climb overnight was unimpressive, and the subsequent falls today hint that fast money is dominating flows, and not a structural turn in sentiment. The technical picture on both remains in downside correction territory.

Asian currencies have rallied overnight, led by the Indian rupee, Korean won and offshore Chinese yuan. A firmer PBOC CNY fix at 6.5527 this morning has supported the regional currency grouping with the Malaysian ringgit, a notable outperformer, USD/MYR falling 120 points to 4.1280 from its New York close. The PBOC quietly drained CNY 10 bio from the system today after the holiday weekend, which has also supported the currency but may be weighing on local equities.

With China keeping the yuan form in recent times, Asian currencies have weathered the US dollar storm relatively well. It is too early to call a top in the US dollar based on one overnight session, but further regional appreciation will continue if the risk rally evolves this week. However, I expect the rupee, rupiah, baht and Philippine peso to be the region’s underperformers.

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