US dollar holds onto overnight gains

Risk aversion providing support to US dollar

The US dollar held onto most of yesterday’s early-session gains overnight, boosted by a rise in US yields in New York, as investors continue to pour haven flows into the greenback. The huge rallies in commodity prices are also supportive, with a large portion of that international trade priced in US dollars.

The dollar index finished 0.74% higher at 99.24 overnight, with some profit-taking pushing it slightly lower to 99.16 in Asia as the news tickers remain relatively quiet.  The technical indicators are showing the index as grossly overbought right now, and a deeper correction if things stay relatively quiet in Eastern Europe, or commodities correct, is possible. Any retreat is likely to be only temporary, however.

EUR/USD remains under pressure, closing at 1.0855, having tested multi-year support at 1.0800 earlier in the session. EUR/USD has room to correct higher from a technical perspective but will likely find plenty of sellers into 1.1000. Similarly, GBP/USD has recovered to 1.3125, but the price action looks corrective. USD/JPY has risen to 115.40 as US yields firmed overnight.

The rally by AUD and NZD ran out of steam overnight, with the commodity-based support being replaced by risk-aversion flows as the day wore on. AUD/USD finished 0.80% lower at 0.7315, and NZD/USD fell 0.55% to 0.6825. Having booked strong gains over the past weeks as commodities rallied, the antipodeans are looking more vulnerable to risk-aversion flows now. A daily close below  0.7300 and 0.6800 signals a deeper correction in the short term.

The PBOC set a surprisingly strong yuan fixing today at 6.3185, which has pushed onshore USD/CNY lower to 6.3125, and offshore USD/CNH lower to 6.3170. USD/Yuan remains anchored below 6.3300, with haven inflows capping any yuan weakness. Notably, on a trade-weighted basis, the CFETS basket has the yuan trading at record highs on a trade-weighted basis, a situation that doesn’t seem to be concerning authorities at the moment, probably with one eye on their imported commodities bill.

Regional Asian currencies are still trading on the weaker side, however, and as large energy importers, it is hard to constructive a bullish case in this environment. USD/KRW has risen 0.30% today to 1235.70, with the TWD and THB also weaker. USD/PHP broke higher through 52.00 yesterday and has settled at 52.12 this morning, more gains perhaps limited by the threat of central bank intervention. USD/INR has fallen 0.25% in early trade to 76.90, having traded to 77.20 yesterday, boosted by a ruling party win in a key state election overnight. The lull is likely only temporary, and USD/INR remains on track to retest 77.40.

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