US dollar rally continues

Bullard’s hawkish comments boost US dollar

The dollar index rose once again overnight, flattered by further losses by the Japanese yen and a slight rise in US yields overnight after the Bullard comments. The dollar index rose 0.32% to 100.80 overnight, adding another 0.18% to 101.00 as the yen tumble continues in Asia. Resistance at 100.90 has been taken out and a close above 101.00 signals more gains targeting the 2020 pandemic-panic highs at 103.00. Support is between 99.40 and 99.55. One note of short-term caution is that the relative strength index (RSI) is now in extreme overbought territory. That means that the dollar index is vulnerable to a potentially ugly, if temporary, pullback in the days ahead.

Both euro and sterling held steady overnight, finishing almost unchanged. The real action has been seen in the Japanese yen where USD/JPY rose 0.43% to 127.00 overnight, before soaring another 0.93% to 128.18 in Asian trading today. With the Bank of Japan capping 10-year JGBs at 0.25% and US yields edging higher again overnight, the soaring US/Japan interest rate differential is quickly turning the yen sell-off into a rout. Oddly, the rhetoric from the MoF and BoJ has been almost silent today and I do not think we are near intervention levels. Having said that, a near 200-point loss in 24 hours will have alarm bells ringing.

Although USD/JPY’s next target should be 130.00, the extremely overbought RSI and scale of the sell-off in the past four sessions does leave USD/JPY vulnerable to a technical pullback. That could extend to near 126.00 if the fast money bolts and runs, but I would suggest that if USD/JPY falls to those levels, there will be a wall of fresh money waiting with open arms.

Both the Australian and New Zealand dollars are benefiting from the yen’s demise, with AUD/JPY and NZD/JPY buying in evidence. That has helped AUD/USD hold above critical support at 0.7320, trading at 0.7375 today. A sharp drop could in USD/JPY could weigh on both AUD/USD and NZD/USD and the technical picture for NZD/USD remains very negative.

The weakness of the yen appears to be spilling over into other regional currencies, with the SGD, KRW, TWD, and MYR notable losers overnight, that weakness continuing today. A rise by USD/JPY through 130.00 is likely to spark further waves of selling in regional currencies, not helped by oil prices tracing out large gains in the past few sessions. Markets, at this stage, appear to be pricing a more gentle, even reluctant hiking scenario by regional Asia, exacerbating a widening US/Asia rate differential. I expect this theme to dominate trading over the rest of Q2.

The offshore and onshore Chinese yuan remain steady, USD/CNH and USD/CNY hovering just below one-year resistance lines at 6.3920 and 6.3750 as US dollar strength is offset by weakness of the euro and yen in the CFETS trade basket. Markets in China look set to remain steady until the one and five-year Loan Prime Rate (LPR) decisions tomorrow. A cut should see both USD/CNH and USD/CNY finally break higher.

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