The US dollar finally finds some friends

The US dollar rallied strongly versus the major currencies overnight, notably against the Japanese yen, which weakened by over 1.20%, USD/JPY closing at 105.80 on Friday. That said, I cannot find one piece of news to explain the sudden rally. What is notable is that a bullish USD/JPY outside reversal day was traced out. Today, USD/JPY spiked above 106.00 before returning to 105.80, likely on stop-loss buyers and thin early morning liquidity. USD/JPY should target a return to 106.60 initially.

In a volatile session, the dollar index rose o.53% to 93.46, narrowly avoiding tracing out a bullish outside reversal day itself. The dollar index is unchanged in Asia after spiking higher in early trade but is targeting a return to 94.00 before we reassess direction.

EUR/USD touched 1.1900 before sellers emerged, pushing the single currency back to 1.1775. Sterling also rallied, reaching 1.3170 before falling to an unchanged 1.3070. Selling in the EUR/GBP cross appears to have exaggerated the euro’s fall while limiting the damage on sterling. From a technical perspective, both seem poised to retreat further, with initial targets at 1.1700 and 1.3000 respectively.

A stronger US dollar and Covid-19 fears have torpedoed the Australian dollar, dragging the New Zealand dollar with it. The AUD/USD has formed a formidable top at 0.7200, as has the NZD/USD at 0.6700. Both look likely to ease further in the first half of the week.

Regional currencies, having only bought into the US dollar rotation late in the day, has outperformed as a result. Across Asia, having eased only slightly on Friday, Asian currencies are almost unchanged today. It appears that a dollar correction will fall heaviest on the G-10 family.

Overall, the underlying reasons for the US dollar sell-off remain firmly intact. However, nothing moves in a linear fashion forever, and this week seems likely to feature more dollar strength than last. A weak Non-Farm Payrolls print on Friday could extend the dollar strength into next week on haven flows.

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