Currency markets are mixed

Euro steady, sterling rises

The US dollar mostly retreated overnight as Fed rate hike expectations were pared for March and investors hoped for progress in the Ukraine-Russia meeting expected today. The dollar index eased slightly by 0.04% to 97.36, but with oil prices on fire in Asia today has resumed its ascent, climbing 0.16% to 97.51. Its short-term direction continues to be at the mercy of Ukraine developments although I note that whispers of positive news have not severely dented US dollar strength.

EUR/USD remains anchored around support at 1.1100 today, despite spiking lower to 1.1050 in the overnight session. There appears to have been large EUR/GBP selling flows that went through the market as GBP/USD rallied to 1.3400, where it remains today. As long as EUR/USD clings to 1.1100, there is still potential for a decent short-squeeze. Long-term support is at 1.0800.

AUD, NZD and CAD all rallied strongly as global sentiment took a tentative step higher, with CAD’s rally aided by a 0.25% hike by the Bank of Canada. AUD/USD and NZD/USD are nearing resistance at 0.7300 and 0.6800 respectively, while USD/CAD is flirting with support at 1.2830. Positive developments from Eastern Europe could spark a potentially aggressive rally by all three sentiment indicators, but I would prefer to wait for absolute confirmation.

Asian currencies also staged modest rallies overnight, but the continuing rise in oil prices will cap gains in most regional currencies.  USD/CNH and USD/CNY remain anchored between 6.3100 and 6.3200 as basket component currencies elsewhere remain weak. Yuan strength will likely only weaken if the PBOC decides up to raise the counter-cyclical factor at the fixing.

With most international transactions for energy and commodities being priced in US dollars, demand for greenbacks from the real economy should remain robust, softening any short-term retreats.

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