Australian dollar takes a China hit

US dollar drifting

The US dollar had another noisy but neutral session overnight, the US dollar index finishing almost unchanged at 91.26. The index has firmed to 91.35 this morning after a weaker China USD/CNY fixing but is still stuck in a broader 90.50 to 91.50 range. Given the propensity of several asset classes to test and fail at range extremes this week, a wait-and-see attitude is the best one from here, unless you like being whipsawed.

EUR/USD continues to flirt with support at 1.2000 but lacks directional momentum either way, as are GBP/USD and USD/JPY at 1.3900 and 109.35, respectively. The US Non-Farm Payrolls tomorrow night should resolve the near-term direction. However, with a 1 million + print now the consensus, I would not be at all surprised if the US dollar now displayed surprising weakness afterwards and that US long bond yields fall.

The Australian dollar has tumbled by 0.40% to 0.7720, dragging the NZD/USD with it, after the Reuters story shows Sino-Australia relations taking another turn for the worse. Given China’s behaviour toward specific Australian export segments to punish Australia, those fears are well-founded. Similarly, admonishing comments from the New Zealand government while China was on holiday weighs on the kiwi, which has fallen in sympathy with the AUD/USD to 0.7190. I would argue that retaliation against New Zealand will have a much more significant impact on the NZD/USD than has been the case with AUD/USD.

AUD/USD has support between 0.7690 and 0.7710, its 100-day moving average. A loss could extend the decline to 0.7500. NZD/USD has 0.7150, signalling a test of 0.7100 and possibly as far as 0.7000. Pushback from China will make the latter almost certain, with New Zealand’s soft commodity exports more easily replaceable by China. As we say in New Zealand, you don’t bring a sheep to a gunfight.

The PBOC set the USD/CNY higher at 6.4895 today, 150 points higher than Friday’s fix. That has led to a bout of US dollar strength versus regional Asian currencies this morning. At this stage, though, the reaction looks like a knee-jerk one, and I doubt we will see a directional bout of US dollar strength ahead of the US data tomorrow night.

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