The dollar thrives in nervous Covid markets

Dollar rises despite lower yields

Some degree of safe-haven flows appears to be emerging in the US dollar as it rallied impressively overnight. The strong bid-to-cover ratios in the short US-note auctions overnight hinting at where much of those haven flows are being parked. That had the effect of pushing US yields lower, leading to some divergence from the past few weeks’ asset correlation playbooks.

With Covid-19 economic recovery delays at the forefront of investors’ minds, the US dollar index powered 0.65% higher to 92.33 overnight, threatening 3-month resistance, and also the 200-DMA, at 92.50. As is Asia’s want recently, G-7 trading has been directionless today as the region takes its cues from New York, with the index almost unchanged.

Amongst the majors, EUR/USD and GBP/USD were notable losers overnight. Lockdowns, vaccine nationalism and spiralling cases in key economies saw the EUR/USD fall 0.70% to 1.1850. That leaves the single currency perched on critical support at 1.1840, with the 200-DMA also here. A daily close lower tonight signals more losses targeting 1.1800 initially, but potentially reaching as far as 1.1600 in the days ahead.

GBP/USD fell 0.85% to 1.3745 overnight, as European threats to block AstraZeneca vaccine exports to the UK escalated fears that their economic recovery could be scuttled. Sterling broke out of its multi-month rising wedge on Friday, and the sell-off overnight darkens the technical picture. GBP/USD has fallen to 1.3730 in Asia. It now targets 1.3600, with the possibility of falling to sub-1.3400 if the Euro-spat deepens.

The Antipodeans were crushed overnight, as risk sentiment turned sour, and in Kiwi’s case, was helped along by new government property measures. AUD/USD has fallen 1.80% in the past day to 0.7605 this morning. The 100-DMA at this level provides temporary support, but having broken 5-month support two weeks ago, the charts suggest AUD/USD faces further losses to 0.7450 initially.

The NZD/USD has fared even worse, falling 2.60% overnight to 0.6980 in Asia trading. The Kiwi also broke 5-month support in the past fortnight and has taken out critical support at 0.7100 overnight. It now has the potential to extend losses, possibly as far as 0.6700 in the days ahead.

The PBOC set the USD/CNY fixing 200 points higher at 6.5232 today, reflecting weakness in the non-dollar components of its basket. Although USD/CNY remains stable at 6.5225 this morning, Asian regional currencies were in full retreat overnight as investor sentiment soured. With interest rates cut to the bone across much of Asia and little appetite to hike them, further US dollar strength will put more downward pressure on regional currencies. Those with current account challenges and/or high levels of foreign-denominated debt will be amongst the most vulnerable, namely the Indian rupee and Indonesian rupiah. The Malaysian ringgit may also suffer more if oil prices continue moving low.

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