Currency markets look for direction

Dollar whipsaws against euro, sterling 

Currency markets were whipsawed last night, with the dollar index trading in a near 80-point range before closing almost unchanged. The dollar was boosted by impressive PMI data, but reversed course as Biden announced key cabinet appointments and then as Trump allowed the GSA to release transition funds to the Biden team. The dollar index ranged between support and resistance at 92.00 and 92.80, before finishing the session, just 0.16% higher at 92.50.

Much the same price action was seen in the euro and sterling. EUR/USD ranged between 1.1800 and 1.1900 before closing midrange at 1.1840. Sterling ranged between 1.3270 and resistance at 1.3400 before closing 0.30% higher for the day at 1.3330. Markets continue to price in a 100% certainty that a Brexit trade deal with Europe will be signed. That has supported the euro and notably the GBP. GBP/USD should quickly test and move through resistance at 1.3500 if a breakthrough is achieved, initially targeting 1.3800 and 1.4000.

The session has also been notable for a rotation out of haven currencies such as yen and Swiss francs, with both sold heavily overnight and into pro-cyclical commodity currencies. The Canadian and Australian dollars rose strongly overnight and into Asia’s session. USD/CAD has fallen 0.27% to 1.3050 this morning and looks set to test support at 1.3000 and 1.2930. AUD/USD has risen 0.40% to 0.7315 today, reversing its modest losses overnight. It looks set to test resistance at 0.7340, which opens the path to further gains above 0.7400.

The New Zealand dollar has outperformed in the pro-cyclical space. It has risen 0.70% today to .6970, boosted by finance minister statements on the property market that have been interpreted as hawkish. The kiwi looks set to test 0.7000 imminently, although the Reserve Bank may have something to say if the rally accelerates from there.

The Chinese yuan is unchanged at 6.5820 today, after a neutral fixing by the PBOC. Regionally, the picture is mixed, with the baht, rupiah and ringgit falling against the US dollar. Meanwhile, the Korean won and New Taiwan dollar have risen against the US dollar. The counterintuitive nature of the price movements suggests that the market was already positioning for more good news on the vaccine front and that profit-taking is dominating flows today. Overall, though, my view is unchanged, and I expect Asian FX to strongly outperform into the end of the year in well into 2021.

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