Clarida sends US dollar higher

US dollar rebounds on Clarida’s hawkish comments

The US dollar reversed intra-day losses to finish the day higher after the Clarida comments signalling a timetable for Federal Reserve tapering and eventual rate hikes starting in 2023. The dollar index rose 0.23% to 92.28, edging higher to 92.31 in Asia. The index remains in a broader 91.50 to 92.60 range, and I await a break of either side to signal the US dollar’s next medium-term move. That said, a disappointingly low Non-Farm Payrolls print tomorrow should see structural support at 91.50 tested by early next week.

EUR/USD and GBP/USD retreated modestly to 1.1833 and 1.3891 as of this morning in the face of US dollar strength overnight but remained in range-trading mode ahead of Friday’s US employment data. USD/JPY climbed 0.40% to 109.40 overnight as US bond yields firmed post-Clarida, edging another 25 points to 109.65 in Asia as US 10-year futures fell this morning (yields rose). USD/JPY remains a purely US/Japan yield differential play at the moment.

Deteriorating risk sentiment saw both AUD/USD and NZDUSD give back some intra-day gains. AUD/USD fell 0.20% to 0.7380, and NZD/USD finished 0.66% higher at 0.7050 after blockbuster employment data. Notably, NZD/USD failed ahead of 0.7100 overnight, where the 100 and 200-day moving averages (DMAs) have converged. The 0.7100 level marks formidable resistance for the kiwi in the short term, but a daily close above it will signal a rally that should target 0.7300.

In Asia, the PBOC set a neutral CNY fix today, leaving USD/CNY marooned at 6.4640, where it has spent most of the past week. Only a rise through 4.4900 again, or a fall through notable support at 6.4500, will signal that USD/CNY is on the move. Except for the Thai baht, which remains near 17-month lows on today’s inflation data and its virus situation, the rest of the Asian FX has continued to quietly carve out gains versus the greenback these past few days. Some China rotation by investors into regional stocks could explain some of the gains, with viral loads priced-in, to some extent, and lower US yields assisting those dirty pegs.

Asia is not out of the delta-variant woods by any measure, and an escalation in virus cases in China will undoubtedly weigh on regional currencies. After soft inflation data, the Philippine peso gave back some of its recent gains, rising 0.70% to 50.08. I remain most concerned with Thailand and Malaysia. Both are struggling with virus cases and also political disruption. Of the two, the Malaysian ringgit looks the shakier as its virus, and the political situation goes from bad to worse. USD/MYR has based around 4.2200, and lower oil prices will be another kidney punch. I expect a retest of 4.2400 sooner rather than later, before rising to 4.2800 next week. Asia’s best outcome tomorrow would be a very low Non-Farm Payrolls pushing US yields and the US dollar lower.

Overall, I expect today to be a quiet session for currency markets as they, like equities, head into a pre-Non-Farm Payrolls holding pattern.

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