US dollar jumps on Fed, China growth

US dollar soars on risk-aversion

The dollar index soared on Friday, as the UK sterling slumped and investor fear around China growth pummelled Asia FX, and Fed rate hike expectations saw a flight to safety. The dollar index leapt 0.50% to 101.11, taking out resistance at 101.00. In Asia today, the rally has continued as China fears take centre stage. The index has risen 0.15% to 101.27. The index’s next technical target is the March 2020 highs around 103.00. With a Fed blackout muting hawkish Fed-speak, and if US earnings releases are strong this week, pullbacks from here are possible, although likely to be temporary. Only a failure of 99.40 changes the US dollar’s bullish outlook.

EUR/USD closed on a weekly basis below 1.0810, a trendline that goes back to 1985. It fell 0.32% to 1.0797 before staging a dead cat bounce to 1.0820 this morning after Macron’s victory in the French presidential election. Currency markets had priced that outcome last week and the rally has evaporated, and EUR/USD has fallen to 1.0780. News that Europe may be preparing “smart sanctions” on Russian energy imports will not assist the single currency in a risk-off atmosphere. The technical picture, assisted by a widening US/Europe interest rate differential, suggests EUR/USD will now fall to 1.0600 en route to 1.0300. I am not ruling out a move below parity if Europe sanctions Russian gas and oil.

Weak UK data on Friday saw GBP/USD stretchered off the field with a season-ending injury. GBP/USD fell 1.45% to 1.2840, easing another 0.31% lower to 1.2800 in Asia today. The relative strength indicator (RSI) is approaching oversold, allowing for some short-covering, but only a rally back through 1.3000 changes the bearish outlook. A shift in BOE rhetoric to dovish last week increases sterling’s downside risks. The 1.2670 region is the next support zone and failure signals deeper losses targeting 1.2200 and potentially sub-1.2000 in the weeks ahead.

USD/JPY held steady at 128.60 on Friday, easing slightly lower to 126.45 in Asia. Reluctance to aggressively short the yen ahead of the BOJ meeting, the BOJ’s operations to cap yields in the JGB market, and some safe-haven inflows from Japanese investors are supporting the yen at the moment. However, USD/JPY risks remain heavily skewed higher, thanks to a hawkish Fed. Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.

The highly risk sentiment-sensitive Australian and New Zealand dollars both tumbled on Friday. AUD/USD lost 1.70% to 0.7245 on Friday and took out its 3-month support line at 0.7340.  China concerns are weighing heavily today, with liquidity impacted by a national holiday. AUD/USD has fallen by another 1.0% to 0.7170 and could target 0.7100 this week as Friday’s technical break was a decisive one. NZD/USD slumped by 1.45% to 0.6635 on Friday, a national holiday seeing the kiwi fall 0.60% to 0.6595 today. NZD/USD remains in a technical bear market since its fall through 0.6840. Having already reached 0.6600 in 24 hours, some short-term rallies are possible, but it remains on track to test 0.6525 this week.

The onshore and offshore Chinese yuan sailed through 6.5000 on Friday like a hot knife through butter. Weekend developments around Covid-zero have seen another wave of risk-aversion sweep China markets, pushing USD/CNY 0.70% higher to 6.5450, and USD/CNH 0.82% higher to 6.5800. The fall has been precipitous since both USD/CNY and USD/CNH broke through 1-year resistance lines last week and with the PBOC showing no discomfort around the pace or extent of the yuan decline, pressure will remain on the currencies this week as China growth concerns accelerate. Until the PBOC signals the selloff has gone far enough, both CNY and CNH should continue leading Asia FX lower.

USD/Asia rose powerfully on Friday as risk aversion swept New York markets, exacerbated by China slowdown fears. The losses were led by the Singapore dollar and Malaysian ringgit, with the resource-centric Indonesian rupiah remaining stable and the Korean won and Taiwan dollar and Thai baht having modest losses. USD/KRW, USD/TWD and particularly USD/PHP are all running into resistance at present levels, but I am suspicious that their central banks are around capping gains, especially the BSP. USD/IDR has started to crack today, rising 0.65% to 14450.00 after Friday’s edible oil export ban.

USD/MYR has also risen another 0.65% to 4.3490, and USD/SGD has risen by 0.20% to 1.3737. The ringgit’s precipitous fall recently has surprised me, MYR gaining zero benefit from higher commodity prices. Both it, and the SGD to a certain extent, appear to be being used as a proxy for China growth, Singapore being Malaysia’s largest trading partner. With no sign that Bank Negara is going to move to a hawkish monetary policy, MYR will remain under pressure until China shows signs of stabilising. USD/MYR is on track to retest its pandemic lows of 4.4000 and 4.4500.

The divergence in US/Asia monetary policy, and now China growth fears, are now making themselves felt. I expect USD/Asia strength to continue in the months ahead unless regional central banks start deploying their forex reserves heavily.

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