Steepening yield curve lifts US dollar

US dollar rises as Powell to remain Fed Chair

The Powell renomination put the Fed taper trade front and centre once again overnight, with markets quickly moving to price in a first 0.25% hike by mid-2022 and long-dated US yields rising sharply. That saw yet another impressive move higher for the US dollar, with the dollar index climbing by 0.45% to 96.50 where it remains this morning. The index’s initial target is the June 2020 highs around 97.80 with support at 96.00 and 95.50. Having come a long way in a short time, the index’s relative strength index (RSI) indicator is now in overbought territory. That suggests the US dollar is vulnerable to a short-term correction lower before resuming its uptrend.

The Australian and New Zealand dollars held steady at 0.7225 and 0.6950 overnight as risk sentiment steadied after the Powell announcement. Rising commodity prices see AUD/USD unchanged in Asia, helped by AUD/JPY buying. It is likely to remain under pressure though if the US dollar keeps rising and failure of 0.7220 opening further falls to 0.7150. NZD/USD has eased to 0.6935 after soft Retail Sales and if the Reserve Bank only hikes by 0.25% tomorrow, Kiwi could come under sustained pressure targeting 0.6900 initially and potentially 0.6800 later in the week.

USD/JPY volumes have been thinned by a Japan holiday today, but the effect of the US/Japan yield differential was there for all to see overnight as US yields spiked higher. USD/JPY has risen 100 points in the last 24 hours to 115.10 this morning, moving through resistance at 115.00. If the US yield rise is maintained, USD/JPY could extend to 115.60 in the first instance, while support remains at 114.00 and 113.50.

EUR/USD suffered once again overnight, weighed down by Covid-19 recovery fears and a broad rally in the US dollar. It retreated another 0.40% to 1.1240 where it remains in Asia. The single currency remains on track to test 1.1160 this week and that in turn sets up a potential retest of 1.1000. A reversal by US yields tonight could grant it a stay of execution, although weak PMIs this afternoon would likely see renewed selling.  GBP/USD continues to find support due to its more impressive data of late but will remain guilty by geographic association with the euro. GBP/USD has fallen to the bottom of its 1.3400 to 1.3500 range. EUR/GBP selling continues to alleviate the effects of a stronger US dollar and only failure of 1.3350 signals a new move lower.

The PBOC set yet another weaker yuan fix versus the US dollar today, but so far, currency markets are refusing to take the bait. USD/CNY remains anchored below 6.3900, perhaps aided by inflows related to the massive trade surplus, weakness in ex-dollar basket components, and inflows into China’s investment-grade bond market. Elsewhere, some weakness is starting to show in regional currencies, with the Malaysian ringgit, Thai baht, Indian rupee, and Indonesian rupiah showing some nerves over the climb in US yields overnight. Only the Korean won is holding its own as the street awaits to see if the Bank of Korea hikes rates this week. The persistent strength in the Chinese yuan continues to shield regional Asia from the worst of the US dollar rally seen in the G-10 space. With policy rates at record lows and going nowhere in most of Asia, their currency strength will depend on the persistence of the rise in US yields.

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