Risk aversion lifts the US dollar

Omicron jitters boost US dollar

There’s something to be said for being the least-ugly horse in the glue factory, and the US dollar seems to be that horse right now. On Friday, risk aversion saw the dollar index soar by 0.65% to 96.67, before edging lower to 96.60 in Asia. Chief losers were the low yielders, notably the euro and the yen. The incipient rally in the world’s most popular sentiment indicators, the Canadian, Australian and New Zealand dollars, was also quickly snuffed out. US treasury yields are falling in Asia today, indicative of haven flows continuing in US bonds, and that alone should limit US dollar pullbacks. 96.00 and 97.00 should contain the dollar index nicely this week, with a daily close above or below signalling the US dollar’s next directional move.

With virus restrictions ramping up in Europe, EUR/USD’s recovery rally ended as soon as it began on Friday, falling 0.70% to 1.1235, before short-covering lifted it to 1.1248 today. The single currency has failed several times above 1.1360 last week, and weekend developments do not give much reason to change that opinion. Rallies are there to be sold with a failure of 1.1200 opening the downside to 1.1000. EUR/USD has multi-decade support at 1.0700.

USD/JPY has support at 113.00 and with the Bank of Japan reiterating the last 30 years of guidance this morning, that is it is not time to start withdrawing stimulus, the topside remains the weakest link. Having failed ahead of 1.3400, and with virus and political woes mounting, sterling will be challenged to even rally back to 1.3300 now. The 200-day moving average (DMA) at 1.3145 is immediate support.

As global sentiment barometers, the CAD, AUD, and NZD were stretchered off the field on Friday and have eased further today to 1.2896, 0.7120 and 0.6725 respectively. NZD/USD looks like the ugliest duckling, but all three are now back to approaching 2021 lows. Her Majesty’s Commonwealth Dominions need some good omicron news and fast.

Asian currencies have had a mixed performance. The yuan continues to strengthen despite weaker fixes from the PBOC. With China’s borders likely closed for all of 2022, the trade surplus flows will continue underpinning yuan strength. The SGD, THB, PHP, and IDR have all performed well post-FOMC, most likely because omicron has been discounted as a risk factor by investors. Although the INR and KRW have failed to rally, they are still holding steady. Both currencies are likely to feel the heat of fast-money outflows into the year-end, limiting gains.

Rather surprisingly, Asian currencies remain mostly resolute in the face of a souring sentiment environment and a strong US dollar. The main exception is the stagflation-ista Indian rupee which is also likely suffering fast-money outflows into the year-end, having been the major beneficiary of the shared prosperity clampdowns in China. The main reason for Asian FX fortitude lies with the Chinese yuan, I believe. Despite the PBOC setting weaker yuan fixes of late, the yuan is refusing to play ball in open markets. Part of this is the China trade surplus being recycled, and not offset by open borders allowing movement. The solidity of the yuan has acted as a stabilising influence on regional Asian currencies. Whether this continues is open for debate.

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