Higher US yields lift the dollar

Brainard’s hawkish comments buoy the US dollar

The US dollar rose overnight as US long-dated yields spiked higher after very hawkish comments from the Fed’s Brainard, previously one of its most dovish officials. A robust ISM Non-Manufacturing PMI and ISM Non-Manufacturing employment, new orders and business activity served as an additional tailwind. The dollar index rose 0.50% to 99.48, gaining another 0.10% to 99.58 in Asia.

The dollar index has now moved through resistance at 99.50, which technically, suggests the rally should extend to the 100.50/101.00 region for starters. I would prefer to see a more sustained break of 99.50 before making that call, but with interest rate differentials widening, and the situation darkening in Eastern Europe, dips should be well supported now. The longevity of the US dollar rally from here really depends on whether you believe markets have fully priced in the Fed’s tightening cycle. The FOMC minutes may help answer that, but looking around the world right now, the US dollar is definitely one of the least ugly horses in the glue factory.

EUR/USD slumped again with more Russian sanctions on the way, French election nerves and climbing US yields. It fell 0.60% to 1.0905 and is now within shouting distance of muti-year, and multi-decade support, if your charts go back to the ’90s. A sustained break would target 1.0600 and 1.0300 initially. Resistance is now at 1.1200, with longer-term resistance at 1.1320. If the sanctions to be announced today are softer than expected, EUR/USD could stage a relief rally above 1.1000, but I suspect any gains will be hard to maintain.

The moves higher in US yields saw USD/JPY rally through resistance at 123.25, climbing 0.68% to 123.60. It has added another 0.13% to 123.77 in Asia. Rather surprisingly, there has been no “watching FX markets closely” noise from the Bank of Japan or Ministry of Finance today, emboldening USD/JPY bulls and powered by an ever-widening US/Japan rate differential. The late March highs at 125.10 are now in sight again, followed by 125.80. Unless the FOMC minutes are less hawkish tonight, allowing markets to assume they have priced the worst in for the FOMC on monetary tightening, USD/JPY should find plenty of support into 122.50.

AUD/USD surged 200 points higher at one stage yesterday after the RBA changed its statement language to a slightly hawkish tone. Brainard’s comments in the US saw the fast money retreat just as quickly, pushing AUD/USD all the way back from 0.7660 to 0.7580, where it remains in Asia. Nevertheless, AUD/USD has held above its breakout point at 0.7550, a bullish technical development. With markets playing catchup to RBA tightening, support on the crosses against low yields like the yen, and robust commodity prices, AUD/USD should find its way back to 0.7660, sooner rather than later.

The PBOC set a neutral USD/CNY fixing at 6.3799 today after the holiday break. Nonetheless, both USD/CNY and USD/CNH are trading much lower at 6.3630 and 6.3760. The persistent yuan strength is anchoring regional Asian currencies, which only made small losses versus the US dollar overnight. The Philippines peso has been unusually strong the past week and I am wondering if the BSP, and other regional central banks, might be quietly “smoothing” markets by selling US dollars. A very hawkish FOMC minutes this evening will likely see more US dollar strength and renew downward pressure on Asian currencies. However, unless China steps up its efforts to weaken the yuan, regional currencies should be spared the worst of the greenback strength.

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