The US dollar rallies strongly

Investors eye FOMC rate hike

The US dollar’s rapid recovery continued Friday as investors turned to how hawkish the FOMC will be, the US yield curve continued flattening, and investors loaded up on weekend risk protection. The dollar index rallied 0.60% to 99.12 on Friday, rising to 99.17 in Asia. A sustained break above 99.50 will signal another leg higher for the greenback. Progress by Ukrainian and Russian negotiators leave the potential for a sharp correction to 98.50, but only a close below 97.50 changes the overall bullish outlook.

Selling pressure has returned to the euro after the ECB signalled little interest in hiking rates in this environment last week.  EUR/USD retreated 0.69% to 1.0912 on Friday, where it remains in Asia. That brings the multi-year support line back into sight once again. A sustained fall through 1.0800 will signal a very bearish technical outlook, targeting a move back below parity in the months ahead. A divergence in US/Europe monetary policy, Eastern Europe woes and soaring commodity prices mean that long-term resistance at 1.1400 will remain out of reach. GBP/USD is also looking vulnerable, falling to 1.3019 in Asia. If the Bank of England fails to hike by 0.25% on Thursday and is not hawkish enough, sterling is set to retest 1.2700.

Geopolitical and economic nerves have eroded sentiment amongst investors, and as a result, both AUD and NZD have retreated over the past two sessions to 0.7255 and 0.6795 respectively. That has reversed the bullish technical picture for both, with the relative strength indicator (RSI), now in neutral territory from overbought. That leaves both vulnerable to resuming their declines once again, although an improvement in the Ukraine theatre could see them stage a sharp sentiment rally. It is a coin toss at these levels.

Asian currencies spent Friday retreating and that has continued today after China’s Shenzhen lockdown and with the PBOC setting a very weak yuan fixing at 6.3506 today. The fixing may be signalling that the PBOC has reached its limit on yuan appreciation now and Asian currencies will struggle to rally if the PBOC starts applying more aggressive countercyclical factors to the USD/CNY fix. I also believe the monetary policy divergence is also starting to weigh more heavily on Asian currencies with the FOMC expected to hike this week, with hawkish forward guidance. With Asia, a huge net importer of energy and commodities, unwilling to hike interest rates despite stagflationary pressures and tighter US monetary policy, combined with slower China growth, the macro environment is negative for Asian currencies.

USD/JPY exploded higher to 117.35 on Friday after resistance at 116.50 failed, rising to 117.75 today. The Korean won, Philippine peso and New Taiwan dollar are also under pressure with USD/CNY breaking out of the topside and rising to 3.3650, trading above the fix. The question will be, how much of the foreign reserves will Asian central banks want to spend in H1 2022 to defend their currencies? Possible winners in Asia remain the Malaysian ringgit and most especially, the Indonesian rupiah, thanks to their resource bases.

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