US dollar sell-off continues at a reduced pace

US dollar dips overnight and in Asia

The rotation out of US dollar continued overnight, albeit at a less frenzied pace than the day before. Currency markets are almost entirely ignoring the US intention to close China’s Houston consulate. The US dollar index fell 0.20% to 94.95 and has eased slightly again in Asia, to 94.92. The mid-March lows in the dollar index at 94.65 remain the initial technical target.

EUR/USD again outperformed overnight. The euro rose to 1.1600, before retreating to 1.1570, recording a 0.70% gain for the session. The single currency seems likely to retest 1.1600 in the near-term, on its way to 1.1800 in the coming week. GBP/USD closed above its 200-day moving average (DMA) at 1.2698 overnight, finishing unchanged at 1.2735, with 1.2800 its initial target. The trade-centric Australian dollar also consolidated its recent gains, rising slightly to 0.7150.

With Japan away, currency trading has been muted in Asia today, with most major and regional currencies almost unchanged from their New York closes. Although we note the regional Asian currencies have shown no nerves over US/China tensions, which is a positive sign that their rally will continue.

The one exception has been onshore and offshore Chinese yuan, both of which have retreated today on the Houston consulate situation. The PBOC set a much higher USD/CNY fix at 6.9921 this morning, partially reflecting US dollar weakness in the basket, but also sending a subtle message to China hawks in Washington. Both USD/CNY and USD/CNH rose from 6.9800 support to 7.0000 overnight and advanced to 7.0035 and 7.0055 respectively this morning. Resistance lies at 7.0250 and yuan’s next move will be dictated by when and by how China retaliates.

Overall, the rotation out of US dollar remains on track, although the Japan holiday has muted activity in the region. Markets are assigning a higher weight to the EU stimulus package and vaccine progress, rather than geopolitics.

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