US/China thaw lifts Asian currencies

Asian currencies rally on US/China hopes

Currency markets had another dire overnight session, with volatility proving an elusive beast these days. Lower US yields were enough to send the dollar index just 0.20% lower to 92.52, easing another 0.06% to 92.47 this morning. EUR/USD tested support at 1.1800 overnight, but this held, and EUR/USD has recovered to 1.1830 this morning. GBP/USD rallied by 0.47% to 1.3835 overnight after a Bank of England official talked rate hikes. GBP/USD has risen to 1.3848 today but still faces stern resistance between 1.3900 and 1.3920, its 100-day moving average (DMA).

This morning’s phone call between Presidents Biden and Xi phone call has propelled Asian currencies higher today, with USD/ASEAN around 0.20% and USD/KRW also falling by 0.22% after a tough week for the won. AUD/USD and NZD/USD, with a high beta to Asia at the best of times, have climbed by 0.22% to 0.7383 and 0.7120, respectively, alleviating their downside pressures of the past few days. 0.7300 and 0.7080 should mark interim lows now, setting Asia FX and AUD and NZD up for further advances into next week.

USD/JPY, still a dull US/Japan rate differential place, plummeted by 0.50% to 109.70 before recovering marginally to 109.80 this morning. The culprit was the fall in US yields across the curve, notably in the 30-year tenor, after a robust 30-year US bond auction. With tapering talk in the US dominating the narrative this week, there are likely to be quite a few longs above 110.00 quite nervous now. A failure of support at 109.60 could spur a reactionary sell-off to 109.00.

Despite some individual noises and the moves in USD/Asia today, volatility in currency markets remains muted. In the bigger picture, the dollar index is bouncing around in a wider 92.00 to 93.20 range. German and Canadian elections are unlikely to be enough to lift the lethargy in forex markets; we may require a surprise from this month’s FOMC to achieve that.

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