US dollar dips as equities rise

Profit-taking forces the US dollar lower

With US stock markets finishing Friday on a positive note, boosted by Merck’s oral Covid-19 treatment that lifted hopes of a boost in economic recovery, the US dollar gave back some more of its recent gains. US yields also fell modestly, further undermining the US dollar with soothed nerves on Friday lessening the haven bid. The dollar index fell by 0.18% to 94.07.

The dollar index has risen slightly to 94.10 in Asia as US 10-year futures fell after the Democrat legislative logjam became even more so over the weekend. Overall though, with a number of holidays in the region, Asian currency markets are very quiet today.

EUR/USD and GBP/USD staged corrective rallies on Friday as the US dollar fell. However, EUR/USD remains below 1.1600 in Asia this morning and remains near to the bottom of its weekly range. Only a rally through 1.1660 changes the bearish outlook. GBP/USD rose 0.50% on Friday to 1.3545, edging lower to 1.3535 in Asia. The aggressive rally is as much a function of the equally aggressive sell-off last week than anything else. There is still plenty of risk around the pound, be it energy or northern Ireland/Europe, of supply chain shortages. Only a move above 1.3620 signals respite.

USD/JPY has fallen back to 111.05 today as US yields edged lower pushing the US dollar lower on Friday. Despite a change in prime minister and an impending election, USD/JPY remains strictly a yield differential play right now. Pivot support remains at 110.50. The easing of risk aversion nerves on Friday has seen both AUD/USD and NZD/USD rise by around 0.50% to 0.7260 and 0.6935 as of this morning. Both remain vulnerable from a technical basis and any drop in risk sentiment, something I suspect, is only taking a short break. NZD/USD fell this morning after Covid-19 cases were reported outside of Auckland at the weekend. However, the government is going ahead with a lightening of restrictions in Auckland this week, and it has regained all of those losses.

With mainland China and South Korea on holiday, Asian currencies are having a very quiet session today, and are mostly unchanged from their New York closes. Asian currencies pared their losses on Friday as the US dollar weakened but I believe the US dollar weakness is temporary and their downtrend will resume, particularly the more vulnerable INR, IDR, THB and PHP. We could be in for a week of range-trading ahead though ahead of Friday’s US Non-Farm Payrolls. A strong number will reinvigorate the Fed taper and be a headwind for Asian FX.

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