US yields boost the dollar

US dollar rebounds as US yields climb

Rising US yields saw the US dollar stage an abrupt change of direction overnight, with the dollar index climbing 0.33% to 89.82. The dollar index has ground higher to 89.85 today and is threatening resistance at 90.00. A weekly close above 90.00 would signal that the US dollar squeeze will continue. Notably, the dollar index has no meaningful technical resistance until 91.00.

The major and commodity currencies all retreated overnight, with the Australian and New Zealand dollars notably weaker. Both Australasians though remain well entrenched in technical uptrends, and only falls through 0.7600 and 0.7150 would threaten the underlying bull markets. USD/JPY staged an impressive rally to 103.80 overnight and bears monitoring. USD/JPY is extremely sensitive to US/Japan rate differentials, and if US yields keep rising, USD/JPY could test its multi-month down channel around 104.50. That could be a hint that a much broader US dollar short squeeze could sweep markets in January.

Other Asian currencies remain mostly unmoved as international investors continue to pile into local markets on the cyclical recovery trade. Regional currencies remain near their recent highs versus the greenback. Notably, though, the Chinese yuan has failed to make further gains after the strong fixing at the start of the week. USD/CNY remains around 6.4500 with the PBOC printing a series of higher USD/CNY fixes in the past few days. That may signal that the PBOC thinks the CNY has done enough against the dollar for now, and that intervention could increase. A short-dollar squeeze in the G-10 space could push the CNY higher on a TWI basis and prompt the PBOC to move the USD/CNY higher more aggressively. That would almost certainly produce a squeeze in short dollar positioning amongst regional Asian currencies as well.

With the FOMC meeting not until the end of January, and with the world short to the eyeballs in US dollars, it could be a cold winter for dollar bears to start the year. Everything will depend on US yields. If they continue moving higher, that could prompt a January short-dollar capitulation. On the bright side of things for dollar bears, the first big move in January is usually the wrong one for the year as a whole.

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