Risk aversion sends US dollar higher

The increasingly higher risks of Covid-19, the US fiscal stimulus impasse, and the impending US elections saw a risk-aversion theme sweep currency markets overnight. The primary beneficiary was the US dollar, although the Japanese yen also made some gains. The US dollar index rose 0.40% to 93.78, squarely in the middle of its two-month range.

US jobless claims climb

The nail in the coffin appears to have been US Initial Jobless Claims, which unexpectedly rose overnight. Fears are increasing that the US jobs recovery may be running out of steam, although I would argue that we need to see more data as yet to confirm this. Nevertheless, when added to the other risk points mentioned above, the US dollar looks set to end the week stronger, and that may well translate into dollar strength all the way to the US elections.

The rally by the US dollar has left several major currencies delicately poised above support. With Europe also struggling with a Brexit trade negotiation impasse, as well as Covid-19 restrictions across the continent, both EUR/USD and GBP/USD fell overnight. EUR/USD fell 0.30% to 1.1710, just above monthly support at 1.1690. Failure targets the 100-day moving average (DMA) at 1.1600, with a loss triggering a potentially much larger correction that runs as far as 1.1150.

Sterling’s volatility continued, giving up its previous day’s gains as it fell 0.85% to 1.2900. Brexit negotiations will continue to move the currency around in 100-point ranges. However, GBP/USD is approaching a critical support zone demarked by trendline support at 1.2870, and its 100-DMA at 1.2835. A daily close below this zone implies further losses to 1.2700 in the first instance. Brexit risk has not been appropriately priced into GBP/USD, in my opinion. A failure to agree on a trade deal leaves sterling potentially vulnerable to deep losses.

The pro-cyclical Australian and New Zealand dollars both fell by nearly 1.0% overnight, leaving both teetering on deeper corrections lower. AUD/USD has broken its 100-DMA at 0.7100, trading at 0.7080 this morning. China fears and a further ramping up of the risk-aversion climate could see AUD/USD move lower to 0.7000 initially. If the US dollar rally continues into next week as expected, AUD/USD could fall to 0.6800. The NZD/USD has fallen to 0.6600 this morning, just above its 100-DMA at 0.6580. It is vulnerable to a deeper corrective sell-off to 0.6500 initially, with US dollar strength next week having the potential to see it fall through support at 0.6400.

Asian currencies continue to hold their own for the most part, coat-tailing a strong yuan and positive China data. However, as risks increase in developed markets at seeming exponential rates, I expect that US dollar strength will erode those gains and Asian currencies to move lower into next week, and possibly into the US election date. Overall, though, I still expect Asian regional currencies to outperform the G-10 in the shorter-term.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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