US dollar gains ground

The US dollar rallies on month-end flows

US inflation data disappointed on Friday, sending US yields lower once again. It was, therefore, surprising to see the US dollar actually rally instead, the greenback finishing the week on a firm note versus both developed and emerging market currencies. I put the US dollar strength down to two processes. Month-end investor portfolio rebalancing flows and haven buying to hedge weekend event risk.

The dollar index rose 0.30% to 92.09 on Friday, edging slightly lower to 92.05 in a non-descript Asian session. The dollar index is now mid-point between its breakout lower at 92.60 and structural support at 91.50, and also home to its 100 and 50-day moving averages. Versus the majors, another week of choppy range trading looms with a break of either 91.50 or 92.60, signalling the next big directional move.

EUR/USD faded at 1.1900 on Friday, with the single currency moving lower to close around 1.1875, where it remains today. A daily close above 1.1900 would signal a further rally targeting 1.2000. In the meantime, it looks supported on dips towards 1.1850. GBP/USD traced out a triple top at 1.3985 on Friday as it faded to finish at 1.3905. A fall through 1.3880 could see more of last week’s gains unwound; otherwise, resistance between 1.3985 and 1.4000 now looks formidable.

Both the Australian and New Zealand dollars fell by 0.60% on Friday as investors reduced risk exposure into the weekend. As a proxy for risk sentiment, which seems rather more cautious among currency markets than equity markets, both are likely to start the week in the middle of their one-week ranges between 0.7300 and 0.7400, and 0.6900 and 0.7000, respectively. The worsening Covid-19 situation is likely to keep the Australian dollar offered this week. However, if New Zealand employment data is robust tomorrow, the kiwi could potentially jump to near 0.7100 and outperform the AUD as traders’ pencil in imminent RBNZ rate hikes.

The PBOC set a neutral USD/CNY fixing this morning, leaving it trading unchanged today at 6.4640, comfortably within its recent 6.4500 to 6.4900 range. However, regional Asian currencies remain under pressure, notably my fragile four, the Indonesian Rupiah, Malaysian Ringgit, Thai Baht, and Indian Rupee. The Indian Rupee will find support from investor inflows to the equity market and low dollar purchases from oil importers. Of the remaining three, the Ringgit looks the most vulnerable.

Malaysia’s deepening Covid-19 and political crisis, with the government’s latest trick to shut down Parliament because of Covid-19 infection fears, both laughable and sparking protests in Kuala Lumpur. USD/MYR should retest 4.2400 this week and could potentially fall to 4.2800 if the political impasse deepens and the Malaysian King gets involved once again.

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