US dollar unwind continues

Lower US yields weigh on greenback

The US dollar eased once again overnight, led by strength in the low yielder space, notably the Japanese yen and the Swiss franc. With asset classes running their own races this week, it seems that the pre-FOMC long US dollar trade is continuing to unwind. The dollar index fell by 0.08% to 93.98 overnight, although a sharp deterioration in equity sentiment today in Asia has seen it rise back to 94.04. The risks remain to the downside for the dollar index as disappointed US bulls continue to unwind strategic long positions after a fence-sitting performance by the FOMC. 93.80 remains initial support and failure targets 93.50. On the upside, resistance above 94.50 has become a formidable barrier.

A weaker US dollar passed the euro and sterling by, with both almost unchanged at 1.1585 and 1.3555. Both continue to be weighed down by dovish central bankers and Brexit/Northern Ireland nerves. EUR/USD has resistance at 1.1625 and support at 1.1515. GBP/USD has resistance at 1.3600 and support at 1.3525.

The Japanese yen was the chief beneficiary of US dollar weakness as US yields edged lower once again across the curve. USD/JPY has fallen to 112.85 and a washout of stale long positioning could see the cross trade as low as 112.00 in the coming days. However, if US yields were to rise meaningfully on US inflation data tonight, the sell-off will be stopped in its tracks. AUD/USD and NZD/USD retreated overnight with US stocks. If sentiment remains heavy, AUD/USD could test nearby support at 0.7360 and potentially fall below 0.7300. NZD/USD is hovering above support at 0.7100 and could retreat to 0.7050.

Asian currencies remain calm today, remaining near yesterday’s levels and maintaining recent gains versus the greenback. Another neutral USD/CNY fix from China today has added a supportive note, although the weakness in Asian stock markets has led to some very gentle weakness in Asian currencies this morning. Regional currency markets look to be in wait-and-see mode once again, ahead of US inflation data this evening.

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