US dollar rebounds on risk aversion
The US dollar reversed higher, unwinding all its post-FOMC losses as risk aversion swept other asset markets and US 10-year yields rose and closed above 3.0%. Support at 102.50 held beautifully on a closing basis, signalling more US dollar gains ahead. The dollar index rose by 1.01% to 103.55 overnight gaining another 0.11% to 103.66 in Asia. Support at 102.50 remains intact with immediate resistance at a double top just ahead of 104.00. A close above 104.00 will signal rapid gains to 105.00 and in the bigger picture, the technical picture still says a multi-month rally to above 120.00 is possible.
EUR/USD fell by 0.76% to 1.0540 overnight, easing to 1.0530 in Asia. EUR/USD has nearby support at 1.0470 and resistance at 1.0650. Overall, the EUR/USD technical picture remains extremely bearish. It remains well below its multi-decade breakout at 1.0800, and only a weekly close above there would suggest the downtrend is over for now. Rallies above 1.0700 will remain hard to sustain with risks skewed to a resumption lower. A Russian retaliation to the EU oil embargo targeting natural gas exports would see EUR/USD move toward parity very quickly.
Sterling collapsed overnight after the Bank of England hiked rates by 0.25%, but signalled a UK recession next year, marking 2023 growth down to -0.25%. Combined with US dollar strength, GBP/USD fell by 2.21% to 1.2355, edging up to 1.2360 in Asia. GBP/USD has immediate resistance at 1.2400 and then 1.2635. The technical picture is very negative now and failure of the overnight low at 1.2325 will signal another selloff to 1.2200. In the months ahead, GBP/USD could well test its Brexit and then March 2020 lows.
Japan has returned from holidays today, with USD/JPY rising 0.84% to 131.15 overnight as US 10-year yields shot up through 3.0% once again. Today, USD/JPY has gained 0.30$ to 131.60, with the yen getting no solace from higher than expected Tokyo inflation data. With the Bank of Japan showing no signs of adjusting its 0.25% JGB yield cap, and US rates continuing to climb as the Fed gets busy fighting inflation, downside pressure on the yen seems inevitable. A rally by USD/JPY through 132.35 sets the stage for a move to the 135.00 area next week.
Asian currencies, including the offshore yuan, reversed the previous day’s gains plus interest overnight as the risk aversion wave by equities, and higher US yields, saw investors pile into US dollars. With China officials affirming their commitment to covid-zero, China’s growth fears are providing another headwind to regional currencies. With more and more central banks globally capitulating on inflation denial and moving to a rate hiking stance, pressure on Asian currencies is set to ramp up in the months ahead.
A stronger yuan fixing today by the PBOC has had no notable impact on either USD/CNH or USD/CNY. USD/CNH has powered through resistance at 6.7000, on its way to 6.7150 today. USD/CNY has risen to 6.6740. China authorities are showing no signs of concern about the fall of the yuan, and until they do, Asian regional currencies will remain under pressure from a stronger US dollar and diverging monetary policies. Despite the RBI rate hike, USD/INR is testing resistance at 76.60 today, USD/MYR has risen 0.60% to 4.3750 and still has 4.4500 written all over it. Meanwhile, it looks like the central bank in South Korea and the Philippines are around on the topside of USD/KRW and USD/PHP. USD/SGD is testing 1.3900 this morning and failure could see the pair move towards 1.4100 next week.
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Jeffrey Halley
He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays.
A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others.
He was born in New Zealand and holds an MBA from the Cass Business School.
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