US dollar extend gains

Europe Covid situation keeps US dollar firm

The US dollar rally continued on Friday after Austria announced a full national lockdown due to spiralling Covid-19 cases. Fears that new virus restrictions across the Eurozone would derail its recovery saw the US dollar rise against the euro, but it was also evident that haven-related buying also boosted the greenback generally. The dollar index rose 0.57% to 96.06, edging higher to 96.11 in Asia.

The deteriorating risk sentiment weighed on the Australian and New Zealand dollars, which gave up over 0.60% to 0.7250 and 0.7000 respectively. With commodity prices also softening still, AUD/USD is likely to remain under pressure with a failure of 0.7220 opening further falls to 0.7150 initially. NZD/USD may find some support ahead of Retail Sales data and the RBNZ policy decision on Wednesday, With 0.25% priced in, if the RBNZ does not go 0.50%, NZD/USD could fall below 0.6900 this week.

USD/JPY is trading at 114.00 this morning and looks to have settled into a 113.50 to 115.00 trading range for now. Haven buying will support the yen, limiting USD/JPY gains unless long-dated US yields start moving higher across the curve again. With anti-lockdown riots sweeping Europe over the weekend, the environment for the single currency is challenging, without also pricing in a potential economic slowdown because of them. EUR/USD could test 1.1160 this week and that in turn sets up a potential retest of 1.1000. GBP/USD continues to find support due to its more impressive data of late but will remain guilty by geographic association with the euro. GBP/USD is steady at 1.3445 today and looks likely to trade in a choppy 1.3400 to 1.3500 range through the start of the week.

The US dollar strength story has been confirmed mostly to the G-10 space so far with Asian currencies remaining firm, mostly due to a constantly appreciating Chinese yuan. The PBOC set a weaker yuan fixing this morning, and noises were made from China officials over the weekend about speculation in the yuan by banks, which means buying yuan. Taken together, it seems that the PBOC may have felt yuan strength had gone far enough for now and thus regional Asian currencies are likely to struggle this week. I expect them to cautiously mark time for now unless the yuan weakens rapidly, which is unlikely, or US data does not impress this week. Any signs of a slowing in the US would be the catalyst for further Asian FX weakness, as would more Fed officials jumping on the Fed Vice-Chairman’s faster taper narrative.

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