US dollar pares gains in Asia

US dollar eases in Asia after firm CNY fixing

The US dollar posted modest gains on Friday, despite weaker US bond yields, as traders reduced US dollar shorts into the weekend. The dollar index rose 0.15% to 103.05. A firm CNY fixing by the PBOC seems to have been the catalyst for more US dollar weakening today, along with a slow newsreel over the weekend. That has allowed risk sentiment to reassert itself modestly, pushing the dollar index 0.33% lower to 102.69 today. It seems US recession fears are weighing on sentiment ever more heavily for now, and the technical picture suggests the US dollar correction has more to go. A close below support at 102.50 could see the dollar index test 101.00 before the reality of a hawkish Fed reasserts itself.

EUR/USD has risen by 0.35% to 1.0590 today, continuing its recovery from its 1.0350 lows last week. A test of 1.0650 and possibly even the 1.0800 37-year breakout line remain possible, but this is a weak US dollar story and I believe that any rally above 1.0700 will be hard to sustain in the medium-term. In a similar vein, GBP/USD has traced out a low at 1.2155 last week and has risen 0.40% to 1.2545 in Asia. A test of 1.2650 is possible this week but like Europe, the United Kingdom’s structural headwinds leave the longer-term picture still bearish.

The fall in US long-dated yields on Friday has pushed USD/JPY down to 127.35 this morning. Given the weight of long USD/JPY positioning, failure of support at 127.00 could trigger a capitulation trade potentially targeting the 125.00 support area. At those levels though, given the trajectory of US and Japan interest rates, being short becomes a dangerous game.

AUD/USD and NZD/USD have resumed their recoveries after a quiet weekend news-wise green-lighted the sentimentalists to resume buying. AUD/USD has risen 0.60% to 0.7090, and NZD/USD has risen 0.70% to 0.6455. ​ Any rally above 0.7200 or 0.6500 will be challenging though as both currencies remain at the mercy of sudden negative swings in investor sentiment, especially from China. An RBNZ rate hike on Wednesday should allow the NZD to outperform AUD in the earlier part of the week. Beware of a dovishly hawkish RBNZ statement on Wednesday though.

The PBOC has helped the recovery in risk sentiment rally by Asian currencies along today, setting the CNY at a much stronger than expected 6.6756. Most of USD/Asia is lower by around 0.25% today, although USD/MYR and USD/IDR are unchanged. It seems that USD/CNY above 6.8000 is a bridge too far now for the PBOC. But overall, they are probably more concerned about how fast it moved there, and not the overall direction of travel. In the short term, the PBOC’s actions will be supportive of Asian currencies in general. USD/INR and USD/KRW have put in decent tops at 77.80 and 1290.00 respectively. If US yields resume their move higher, I expect Asian currency weakness to reassert itself, although with regional central banks starting to hike now, we should see a slow grind and not an abrupt sell-off.

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