The US dollar retreat continues

Powell’s dovish speech sends dollar downwards

The US dollar retreat deepened overnight, with its correlation to US Treasury yields laid bare for all to see as they also tracked lower after Jerome Powell’s dovish speech. The dollar index fell 0.38% to 92.06, just above its 92.00 pivot point as US markets continued their risk-seeking momentum. A close below 92.00 tonight likely signals the US dollar rally has finished for now, with further losses possible to 91.00 next week. Only a sharp rise in US yields will trigger an about-face.

Developed market currencies were mostly higher, with the British pound treading water at 1.3735 on AstraZeneca concerns. EUR/USD rose by 0.37% to 1.1925, having broken out of its descending wedge on Tuesday. The cross now targets 1.2000 into next week. The fall in US yields saw USD/JPY fall 0.55% to 109.00 as interest rate differentials narrowed. USD/JPY’s overnight low at 109.00 is initial support, and a weekly close below signals a test of major support around 108.50 next week. As usual, the major currencies are almost unchanged in Asia today.

Both the Australian and New Zealand dollars rallied overnight as global risk barometers. AUD/USD rose 0.50% to 0.7650 and NZD/USD rose 0.60% to 0.7650, although both have fallen 15 points in Asia. Despite the noise of the week, both currencies remain confined within well-denoted ranges. AUD/USD between 0.7600 and 07700. NZD/USD between 0.7000 and 0.7070 with critical resistance at 0.7100. I will take upside breakouts by either or both as a final signal that the broader US dollar rally has been completed for now.

Asian currencies remain in a holding pattern as the PBOC keeps the daily fixing hovering on each side of 6.5500 this week. Notable exceptions are Indonesia and India. USD/IDR has risen above 14,500.00 again after President Jokowi said he favoured adding employment to the central bank’s overall mandate. It has been interpreted as eroding central bank independence and reducing their room to tighten monetary policy in the future and has fed into a weaker currency.

India’s Covid-19 issues and the RBI announcement of a formal QE programme saw the Indian rupee once again fall sharply yesterday. USD/INR rose to just shy of 75.00 yesterday before abruptly changing direction and retreating to 74.573, an impressive move. The price action suggests that the RBI intervened, and I expect them to continue doing so, with the INR likely to continue to remain fragile.

A weaker US dollar and falling Treasury yields have taken the heat of EM currencies in the bigger picture, although, as ever, there will be localised exceptions.

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