Risk currencies rally on strong bond auction

US dollar under pressure as yields soften

The flip-flop price action in equities markets has also been reflected in currency markets to a lesser extent, mainly amongst the risk-sensitive Commonwealth’s and regional Asian currencies. A hawkish Bank of Canada saw USD/CAD plummet to 1.0% to 1.2495 overnight, as the BoC trimmed its QE programme, making it the first G-7 central bank to tighten policy since the Covid pandemic.

The Australian and New Zealand dollars also added 0.30% and 0.50%, respectively, versus the greenback. Both have staged bullish falling wedge topside breakouts, initially targeting 0.8000 and 0.7300.

Both EUR/USD and GBP/USD are almost unchanged from yesterday at 1.2045 and 1.3945 this morning, but both have also staged bullish breakouts of falling wedges. As long as US yields remain soft, capping US dollar strength, both should be buys on any dips. This evening, a slightly hawkish ECB could turbo-charge the rallies in both, lifting them to 1.2150 and 1.4000+, respectively.

The Japanese yen has staged a remarkable comeback in April, USD/JPY falling from 111.00 to 108.00 over the past three weeks. The key to the yen’s strength has been the closing of interest rate differentials as US yields have fallen. If this critical correlation remains intact, and USD/JPY strength should be met with a wall of sellers. Covid-19’s escalation in Japan is having no noticeable effect on the yen.

With the US yields continuing to edge lower and the dollar index almost unchanged, the Chinese yuan has quietly strengthened again this week, especially as credit fears of last week have ebbed. The PBOC continues to tighten liquidity in the financial system quietly, and yield hunting inflows are also proving supportive. USD/CNY has quietly slipped back under 6.5000 this week to 6.4850, with USD/CNH falling to 6.4820 this morning. USD/CNY looks set to stabilise in a 6.4500/6.5000 trading range for now and will continue to support regional Asian currencies. However, the Indonesian rupiah and Indian rupee will remain underperformers.

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