US dollar on the move

The US dollar advances

The bull market correction of the US dollar may have come to an end as the greenback resumed its rally overnight, boosted by firm longer-end US yields. US debt ceiling fears ebbed, and the dollar index finished 0.20% higher at 93.98, climbing to 94.05 in Asia. The index has clear support at 93.65, although resistance at 94.50 remains some distance away. That range will likely contain until the US data on Friday.

EUR/USD continues trading in a narrow range on each side of 1.1600. Its rally was capped after ECB’s Lagarde said a rate hike would have no effect in this commodity price-driven environment. For once, I couldn’t agree more. The British pound continues to surprise though after strong Services PMI data yesterday. It rose to 1.3620 overnight before easing to 1.3615 in Asia. It is flirting with its downside breakout line at these levels, and another close above 1.3620 this evening raises the possibility of a short-squeeze to 1.3750. With US yields firming overnight, USD/JPY mechanically rose to 111.45 overnight, climbing to 111.60 today. It remains a yield differential play and this rally could easily reverse course. Only a weekly close above 112.00 might change that narrative in my eyes.

AUD/USD and NZD/USD both traded sideways overnight, but as the sentiment mood has darkened in Asia, both have been quickly sold heavily. AUD/USD has fallen 0.37% to 0.7265, and NZD/USD has fallen 0.43% to 0.6930, with the 0.25% RBNZ rate hike clearly completely priced in. Both will continue to be flung around on the waves of flip-flopping risk sentiment for the rest of the week until the US Non-Farms hopefully, resolves the picture. Of the two, NZD/USD remains the most vulnerable. With the delta-variant outside the Auckland boundaries now, a key supportive factor for NZD over the last 18 months is quickly eroding and could cause an RBNZ pause going forward.

The previous US dollar weakness has had a minimal impact on Asian currencies this week, reflecting their sensitivity to the very real possibility that a Fed taper will be locked and loaded after Friday’s US data. USD/THB and USD/PHP have run into mysterious walls on the upside, hinting that their respective central banks are selling US dollars. But otherwise, Asian currencies are continuing to trade softer versus the greenback. With energy prices continuing to skyrocket, most of which is priced and transacted in US dollars, Asia’s price-taking orientation means regional Asian currencies will remain under pressure, with perhaps the Malaysian ringgit and Indonesian rupiah as exceptions. USD/INR and USD/KRW remain near recent highs at 74.547 and 1189.70 today. 75.000 and 1192.00 look like their respective central bank lines in the sand for now, but I don’t discount both testing those points this week. A combination of a stronger US dollar driven by higher US yields and risk sentiment, and higher energy prices, will continue to be a toxic cocktail for regional currencies.

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