US dollar sees month-end surge

US dollar ends week on high note

The US dollar surged on Friday, thanks to month-end flows and US employment cost data leaping by 1.30% QoQ, its biggest rise since 1996. Given that the measure is closely followed by the Fed, alarm bells started ringing about faster tightening of monetary policy. Nevertheless, given that US yields eased slightly across the curve, I suspect month-end flows were the main driver, combined with a short-term spec market that had got itself short. The dollar index rose by an impressive 0.83% to 81.13, unwinding all its week’s losses. In Asia, the dollar index has continued rallying, rising by 0.14% to 94.26. With the transitory inflation story ringing increasingly hollow, and FOMC taper, and a potential and long-overdue recovery in US Non-Farm Payrolls potentially on Friday, risks are now skewed to the topside for the US dollar. The dollar index could test 94.60 this week.

With the ECB in lower forever mode, despite rising European inflation, the euro took the brunt of the US dollar rally as rate expectations rose in the US. EUR/USD retreated 1.05% to 1.1560 before easing to 1.1545 in Asia. EUR/USD is now within shouting distance of support at 1.1520, failure of which signals more losses to 1.1400. Sterling’s fall from grace was more modest, GBP/USD retreating 0.80% to 1.3685, where it remains this morning. If the Bank of England is not as hawkish as hoped on Thursday, Sterling could well retest the 1.3400 region later in the week. It has initial resistance at 1.3700 and 1.3750.

USD/JPY rose by 0.30% on Friday, lower US yields taking the edge of the strong US dollar story. In Asia, it has risen again, climbing another 0.35% to 114.30 after the LDP win over the weekend, and a fiscal stimulus package to follow, and a Bank of Japan showing no signs of tightening monetary policy. USD/JPY has support at 113.40 while a rise through 114.70 signals more gains above 115.00. A hawkish FOMC opens up a test of 116.00.

AUD/USD and NZD/USD fell only modestly, both retreating around 0.40% to 0.7500 and 0.7165 as of today. The commonwealths were spared the US dollar steamroller elsewhere as global investor sentiment remained positive. A change in the ultra-dovish RBA monetary policy guidance tomorrow, potentially signalled by their no-show in the April 2024 bonds today, leaves AUD open to potentially quite substantial gains this week. That is more likely to be reflected in higher AUD/NZD, AUD/JPY or lower GBP/AUD, then a higher AUD/USD. Nevertheless, a return to 0.7700 cannot be ruled out in that circumstance.

That same positive investor sentiment seems to be sheltering Asian currencies from the worst of US dollar strength today as well, as they closed out Friday with only moderate losses. USD/KRW, USD/MYR are up 0.20% today while USD/THB and USD/IDR are 0.45% higher, bringing losses to around 0.75% for both sessions. The Asian FX outperformance is being helped by some quite strong recoveries in Asian PMIs this morning and an underlying trend of still modest inflation across the region. Another neutral fixing by the PBOC in USD/CNY remains supportive. Volatility will increase in the Asian FX space this week as we get to the US FOMC and US Non-Farm Payrolls. A tapering FOMC and more hawkish guidance, and/or decent Non-Farm data will lift US bond yields and the dollar and will probably see weakness return to the Asian currency space, where nobody in the region looks close to tightening monetary policy.

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