US dollar consolidates

US dollar takes a pause

The US dollar paused for breath overnight, despite more gains by long-dated US yields. With a US holiday ahead and data this evening, currency markets in New York appeared content to consolidate recent greenback gains. The dollar index was almost unchanged at 96.49, before rising to 96.56 in Asia today. The index’s initial target is the June 2020 highs around 97.80 with support at 96.00 and 95.50. The index’s relative strength index (RSI) indicator remains in overbought territory suggesting the US dollar is vulnerable to a short-term correction lower before resuming its uptrend.

USD/JPY volumes were thinned by a Japan holiday yesterday, leaving USD/JPY unchanged around 115.00 this morning. Comments from a Japanese official that they were watching USD/JPY appears to be capping the upside temporarily. Assuming the US yield rise is maintained, USD/JPY could extend gains to 115.60 in the first instance, while support remains at 114.00 and 113.50.

EUR/USD traded in a narrow range overnight but remains covered in silt at 1.1235 today. US dollar strength has been compounded by Europe’s delta situation and the single currency remains on track to test 1.1160 this week. That in turn sets up a potential retest of 1.1000. Only a reversal of US yields lower alleviates the negative outlook, although the Covid-19 situation will cap any gains. GBP/USD probed support at 1.3350 overnight but has since recovered to 1.3375 in Asia. 1.3400 and 1.3500 are resistance while sterling remains vulnerable to a test of 1.3300, being guilty by geographic association with the euro.

An as expected 0.25% hike by the RBNZ today has seen NZD/USD drop sharply by 0.65% to 0.6905, with nearby support at 0.6900 in danger of failing. That would open further losses to 0.6800 initially. With no RBNZ meeting until February now, the kiwi is looking a lot more vulnerable than in recent times. With market hopes of a 0.50% hike now dashed, its yield differential support has eroded. AUD/USD has been dragged lower by the kiwi, falling 0.35% to support at 0.7200 today. Failure signals further losses to 0.7100. With risk sentiment weighted negatively globally now, further US dollar haven buying will darken the outlook further for AUD and NZD.

The PBOC set a neutral fixing, almost unchanged at 6.3903 today while adding CNY 100 billion in liquidity via the repos. USD/CNY, however, remains anchored below 6.3900. That continues to provide some support to regional Asian currencies, but it is only slowing the slow sell-off in weakness Malaysian ringgit, Thai baht, Indian rupee, and Indonesian rupiah as US yields continue to rise. The Korean won is holding steady at 1189.50 as markets await the Bank of Korea policy decision tomorrow. The won could weaken sharply and play catch-up if the BOK hikes by 0.25%, as expected.

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