Currency markets drifting

US dollar drifts on soft retail sales

The US dollar drifted lower overnight following disappointing US Retail Sales and with increasing concerns about the downstream effects of the resurgent Covid-19 pandemic. The data saw US Treasury yields move lower as well, and I suspect that Q3’s gains will be much harder for the US to match in Q4.  That leaves the Federal Reserve meeting well and truly “live” in December, with further easing likely to add to the downward pressures on the US dollar heading into 2021.

With currency markets marking time, awaiting fresh inputs, the US dollar index fell 0.22% to 92.40 overnight, with the September low at 91.75 remaining important support. The sterling continues to rally impressively with markets pricing in the certainty of some sort of UK/EU Brexit trade deal, even as deadlines draw near. Comments from European officials overnight seem to support that theory, with GBP/USD climbing 0.355 in the past 24 hours to 1.3250 this morning, ahead of resistance at 1.3220. An official breakthrough should see GBP/USD resolve higher very quickly, and it would be no surprise to see September’s high of 1.3480 tested.

USD/JPY fell 0.37% to 104.15 overnight as US yields fell. That leaves USD/JPY 250 points lower than a week ago, having tested and failed to break the multi-month trendline at 105.70. Rising Covid-19 alert levels in Tokyo will probably spur more repatriation flows, with USD/JPY set to drift lower to 103.50 in the coming days.

The PBOC set another 2.5 year high for the yuan this morning versus the dollar at 6.5593. Although profit-taking has seen Asian currencies edge lower this morning, the comfort of the PBOC for a stronger yuan will ensure that regional currencies find enthusiastic support on any dips.

The Australian dollar continues to completely ignore the trade dispute with China, with both it and the New Zealand dollar consolidating at the top of their month’s ranges. As a pro-cyclical play, both appear to be biding time before tracing out more gains versus the US dollar.

Although today’s session will remain a quiet one, the underlying bearish case for the US dollar continues, with Asian and commodity currencies set to continue to outperform.

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