The US dollar soars on risk aversion

US dollar jumps on soft retail sales, Covid

The US dollar soared overnight after retail sales missed estimates, adding to investor concerns that the delta-variant is sapping the momentum of the global recovery. Although US bond yields were unchanged, the US dollar benefited from haven buying flows, sending the dollar index 0.56% higher to 93.13. That leaves the dollar index just shy of triple-top resistance at 93.20. A rise through 93.20 signals more US dollar strength targeting 83.50 and then 94.30. Support at 92.50 now looks like a line in the sand, and the greenback’s outlook remains positive as long as it holds.

Although the FOMC minutes will likely be a non-event tonight, yet another Fed President suggested tapering is much nearer, and notably, Mr Kashkari is a dove. Jackson Hole assumes greater importance, as does the September FOMC meeting. I do not expect a move at the meeting. Still, they may signal a December tapering start which will boost the US dollar once again, especially at the expense of Asian currencies whose monetary policy is not aligned. I am therefore expecting the US dollar to move higher through Q4.

Both the euro and sterling fell overnight to 1.1715 and 1.3740. EUR/USD looks to be eroding support near 1.1700 and could fall to 1.1600. However, sterling looks more vulnerable, having tumbled 0.73% overnight and closing below its 200-day moving average (DMA) at 1.3785, which now becomes technical resistance. More US dollar strength could see sterling testing support at 1.3570 in the days ahead, signalling a material retreat lower.

Asia was dominated by New Zealand dollar volatility after the arrival of Covid-19 in Auckland yesterday saw it plunge by 1.45% to 0.6920. After the RBNZ held rates unchanged, NZD/USD fell another 0.50% to 0.6870 before sharply reversing as the central bank signalled the virus had only delayed its hiking trajectory. NZD/USD rallied as high at 0.6950 before settling at 0.6930. New Zealand will likely face an extended lockdown of more than a week, looking at the movements of the original case. Therefore, resistance at 0.6950 should hold rallies, and after the short-squeeze has run its course, I expect kiwi to resume its drift lower.

The Australian dollar has been dragged around like their national rugby team by the All Blacks; I mean the New Zealand dollar. Falling and rising in sympathy yesterday and today. Overall, it continues to struggle as a proxy for markets negative risk-sentiment globally. The technical picture looks poor, despite kiwi’s moves after breaking out of an ascending wedge 0.7350 last week. AUD/USD is trading at 0.7260 and should find resistance at 0.7320. Failure of support at 0.7220 will signal a deeper fall targeting 0.7000.

Asian currencies continued to struggle overnight as the US dollar rallied and investors get more nervous about the delta-variant virus. The threat of a stalling global recovery would hit Asia very hard. One of the most notable losers has been the Korean won, with USD/KRW climbing to 1.05% to 1179.00 overnight. However, the Bank of Korea signalled they were watching the won’s fall “closely” today and fearing intervention, USD/KRW quickly retreated to 1169.00 this morning. USD/MYR continues to test resistance at 4.2400 as its political situation remains as unstable as ever. A close above 4.2400 will signal more losses to 4.3000 in the session ahead unless either the political or virus situation turns quickly to the better.

Overall, growth fears and the possibility of Federal Reserve tapering will continue to weigh on Asian currencies. I expect more interventions to slow the descents, but in the bigger picture, Asian FX faces a challenging landscape into Q4.

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