The US dollar remains a bastion of calm

Currency markets remain a relative bastion of calm compared to other asset classes at the moment, with the US dollar once again holding steady overnight. The dollar index fell just 0.11% to 93.86 where it remains this morning. The 93.50 to 94.00 range continues to hold nicely, and the US dollar’s next directional move awaits a break either way. As the FOMC approaches, I am erring to US dollar strength, especially if short-dated yields keep rising on inflation looking less transitory, and more sticky.

Euro vulnerable as ECB meets

EUR/USD is steady at 1.1605 ahead of today’s ECB meeting with 1.1670 and 1.1520 the levels to watch. A dovish ECB should set the single currency up for a test of 1.1500. Lower borrowing requirements forecast next year in the overnight budget has seen GBP/USD edge back to 1.3740, with a break of 1.3700 likely triggering a washout of the BOE hiking longs. USD/JPY has fallen 20 points to 113.60 post-BOJ, but I suspect a narrowing of the 10-year US/Japan yield differential, and exporter selling above 114.00, mostly explain the fall.  114.50 is unlikely to be retested before the FOMC next week.

Elsewhere, the commodity currencies continue to maintain gains but appear to be running out of steam for now as risk sentiment turns down. Rather surprisingly, USD/CAD finished almost unchanged at 1.2470 overnight, despite the BOC abruptly ending its QE programme and signalling rate hikes. That is probably as good a warning of slowing momentum in the commodity currency space as any, especially with base metals and energy prices under temporary pressure. The rise in Australian rates is supporting AUD/USD for now as it trades near unchanged at 0.7505. A break of 0.7450 or 0.7550 will signal its next directional move. NZD/USD is holding mid-range at 0.7175. With the RBNZ priced in and Delta cases appearing in two South Island cities, NZD/USD is now the most vulnerable of the three, with a break of 0.7120 confirming the start of a downside correction.

Asian currencies remain steady after another neutral PBOC fixing. But with investor sentiment ebbing internationally, and a poor week for local stock markets and increasing China concerns, Asian FX may have seen the best of its recent rally. USD/KRW, having fallen the most recently, is vulnerable to a short-squeeze now. Similarly, the Indonesian rupiah and Malaysian ringgit, with their high beta to commodity prices, could see a return of selling pressure.

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