US dollar stages a surprising rally

The US dollar staged a surprising rally overnight on no particular news, after being on the back door for the past few sessions. The dollar index rose 0.43% to 90.04, where it remains in Asia after probing the topside earlier. However, the dollar index’s rally overnight only moves it back to the upper end of its one-week 89.50 to 90.20 trading range.

Kiwi surges on hawkish RBNZ

Although US yields moved higher at the long-end overnight, supporting the US Dollar, a combination of extended fast-money speculative shorts and the reaction of the New Zealand dollar to the RBNZ’s rate hike timetable sparked some reflection in markets. That, in turn, saw a rush for the door to reduce exposure. If NZD/USD can move 1.0% on the RBNZ, bringing its rate hike window forward to H2 2022, what will happen when the Federal Reserve drops the word taper into its statement, was probably the logic.

USD/JPY climbed 40 points back above 109.00 to 109.10 overnight, highlighting the sensitivity of the pair to US/Japan yield differentials. It remains stranded in a broader 108.50 to 109.50 range, though. Euro and sterling also retreated, but both remain comfortably clear of support that would signal a reversal.

The Chinese yuan ignored US dollar strength and powered higher, USD/CNY falling to 6.3850 this morning. The yuan strength produced mixed results among Asian currencies, with the Korean won and Indian rupee tracking higher. At the same time, the Singapore dollar and Malaysian ringgit remained under some pressure, likely due to their Covid-19 situation.

The fall of USD/CNY through 6.4000 seems to have catalysed a bout of pent-up CNY buying, notably from international investors who have been busy in China stocks this week. It also comes simultaneously as the noise from China’s government about commodity prices ratcheted up sharply. A higher Yuan is an easy fix for higher commodity prices but comes at the cost of higher export prices down the line. It is only a temporary fix, and if the US Dollar continues to strengthen this evening, the retreat of USD/CNY will run out of steam.

Although the DM and EM space diverged overnight, it appears the street is a little nervous being short US dollars into tonight’s US data dump. The US dollar’s next directional move for the sessions ahead should be decided this evening.

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