US dollar on defensive after Powell

Currency markets get back to recovery rotation

Evidence continues to pile up that the US dollar short squeeze in the latter part of January has reached an endgame, with the dollar index closing at 90.17 overnight, just above support at 90.00 for the third day in a row. With Mr Powell getting the buy-everything, inflation be-damned, global recovery trade back on track, currency markets resumed their rotation out of more defensive US dollar positioning.

The chief beneficiaries were the developed market growth-centric commodity currencies. The New Zealand dollar was rising even before the RBNZ surprise this morning, but the Australian dollar also recorded a 0.70% gain, and the Canadian dollar rose 0.60%. Notably, USD/CAD took out monthly support at 1.2585 overnight, on its way to a 1.2515 close, where it finds interim support today. A daily close below 1.2500 signals more Canadian dollar strength, with USD/CAD targeting 1.2250 in the coming week. The story is much the same on the Australian and New Zealand dollars, which should target 0.8050 and 0.7550 in the short-term.

The story was less pronounced, but still positive, for other major currencies. EUR/USD has risen to 1.2160, just below resistance at 1.2185. Once 1.2185 is cleared, EUR/USD should target 1.2350. GBP/USD has a sideways day overnight, trading at 1.4135 today. It, however, had already staged an impressive vaccination-powered breakout of its multi-month channel previously. Having probed 1.4250 overnight, Sterling remains on track to rally towards 1.4400 in the coming days.

The PBOC set the USD/CNY fix at 6.4522 this morning, the stronger yuan reflecting the positive moves by other components in the fixing basket and US dollar weakness overnight. Although the fixing was stronger, it was not markedly so, meaning that Asian currencies did not rally to the same extent as seen in the DM space overnight. The euro will need to strengthen markedly to shift the basket, but more yuan strength seems inevitable once it does, and as the PBOC keeps liquidity tight.

In Asia, the Korean won is this morning’s outperformer, USD/KRW falling 0.25% to 1109.50 as the BoK held rates unchanged. More strength seems inevitable, although I expect the BoK to be “smoothing” as it approaches 1100.00 again.

Overall, the US dollar weakness is reflected primarily through the growth-centric developed market commodity currencies at this time. It seems to a matter of when, and not if, the rest of the DM space and EM starts to play catch-up with US dollar weakness.

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