US dollar falls as risk sentiment rises

US dollar retreats on higher risk appetite

The US dollar weakened overnight despite US yields moving higher and hawkish Fed officials. Like equity markets, currency markets concentrated on positive US data, and a fall in oil prices which lifted risk-seeking sentiment, although I believe this is all part of a bull market correction. The dollar index slumped by 0.85% to 103.30, edging higher to 103.40 in Asia as US index futures fell. Resistance remains at 105.00, and the daily close below 104.00 suggests support at 102.50 could be tested. Failure suggests a deeper correction still.

EUR/USD was one of the main beneficiaries of the swing in risk sentiment, jumping 1.15% to 1.0555 before edging lower to 1.0535 in Asia. Having based at 1.0350 on Friday, EUR/USD has rallied through 1.0500 overnight and could test 1.0650 and possibly even the 1.0800 37-year breakout line. I continue to believe that any rally above 1.0700 will be hard to sustain in the medium term. In a similar vein, GBP/USD has traced out a low at 1.2155 last week and leapt 1.40% higher to 1.2490 overnight, where it remains in Asia. The next resistance is at 1.2650; however, like Europe, the United Kingdom’s structural headwinds leave the longer-term picture still bearish.

The rise in US yields overnight has left USD/JPY trading sideways at 129.20 in Asia, barely changed over the past few days. If US yields remain at these levels, a deeper correction to 127.00 becomes unlikely. In the bigger picture, USD/JPY remains at the mercy of the US/Japan rate differential.

The rally in global sentiment has allowed AUD/USD and NZD/USD to book 0.85% gains once again overnight, rising to 0.7030 and 0.6360 respectively, where they remain in Asia. Any rally to 0.7200 or 0.6500 is likely to see sellers lining up though as both will continue to be buffeted by swings in investor sentiment, especially in China.

Likewise, Asian currencies had a good night overnight, with CNY, CNH, KRW, and SGD the standout performers. USD/CNY at 6.8000 and USD/CNH at 6.8500 have proved formidable barriers, and if both USD/Yuans remain below these levels, more Asia FX strength is possible. Lower oil prices will also help, but if US yields continue to track higher from here, then the US dollar correction versus Asia is likely to quickly run out of steam.

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