US dollar falls overnight

Lower US yields send US dollar lower

A retreat by US yields overnight set off an uneven long-covering move in currency markets, pushing the dollar index sharply lower by 0.65% to 100.34. Having held resistance at 101.00, and with the relative strength index (RSI) at very overbought levels, the dollar index was vulnerable to a pullback. In Asia, the index has clawed back some of its losses, rising 0.19% to 100.53.  Support is at 100 and then between 99.40 and 99.55, with initial resistance still at 101.00.

A suitably not-too-hawkish Jerome Powell this evening could give room for more easing of US yields and see the US dollar correction continue for a few more days. Notably, the US dollar pullback was mostly limited to the DM space with EM in some cases, continuing to fall versus the greenback.

The euro and sterling both gained on US dollar weakness overnight. EUR/USD rose 0.62% to 1.0855, reclaiming the long-term support line around 1.0800. It has eased to 1.0832 in Asia. GBP/USD rose 0.53% to 1.3068 before retreating to 1.3050 in Asia. EUR/USD still risks a close below 1.0800 on a weekly basis which would be a very negative technical development. Only a close above 1.0950 eases that risk. Likewise, GBP/USD needs to close above 1.3100 to ease downside pressure. The price action in Asia makes an unconvincing case in this respect.

USD/JPY tumbled by 0.80% to 127.85 overnight, as US yields fell and with the BOJ standing in the market to cap JGB yields at 0.25%. US 10-year futures have headed lower in Asia, narrowing the rate differential, and it speaks volumes that USD/JPY has quickly climbed by 0.45% to 128.40 in Asia this morning. That further reinforces the theory that this is a temporary US dollar correction. The RSI remains very overbought, and a deeper correction is possible. Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.

AUD/USD and NZD/USD booked just 1.00% plus gains overnight, rising to 0.7450 and 0.6808.  Both are retreating in Asia though with AUD/USD falling 0.37% to 0.7425, and NZD/USD falling 0.43% to 0.6780.  AUD/USD continues holding hold above critical support at 0.7320 and looks the more constructive of the two, thanks in no small part, to firm coal and other resource prices. NZD/USD remains well below its breakout line, today at 0.6840 and remains in danger of retesting 0.6700 as inflation hits 32-year highs, with the RBNZ perceived as well behind the inflation fight.

In a stark warning to US dollar bears, the Chinese yuan sell-off accelerated overnight and has continued in Asia today. USD/CNY and USD/CNH rose 0.40% to 6.41900 and 6.4450, adding another 0.35% to 6.4410 and 6.4650 today. That is despite the PBOC setting a neutral USD/CNY fixing this morning. Since both onshore and offshore USD/yuans broke through one-year resistance lines this week, the selloff has accelerated. Negativity around China’s Covid-zero policy is partly responsible, but it appears the PBOC is quite happy to nudge the trend along. A weaker currency appears preferable to wider domestic stimulus it seems now. We could well see 6.5000 by next week.

The sharp fall by the yuan over the last 24 hours has set off a wave of Asian FX selling today. USD/KRW has risen by 0.30%, USD/SGD, USD/THB, USD/TWD, and USD/MYR are all around 0.20% higher. It is also a warning that USD/JPY sellers should not get too wedded to their positions.  If China is now embarking on a yuan-weakening path in a rear-guard action to support growth, Asian regional currencies now face even more challenges as their monetary policies diverge from the United States. More weakness lies ahead.

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