US dollar dips despite political risk

US dollar declines despite stimulus and election uncertainty

The US dollar bucked the risk-off tone sweeping financial markets overnight, with the dollar index plunging 0.50% to 92.60, carving through major supports at 93.00 and 92.75. Much of the fall, though, can be attributed to the strong performances of the sterling and Japanese yen overnight.

USD/JPY fell by 1.0% to 104.60 which I attribute to repatriation flows, despite a steepening US yield curve. The yen’s safe-haven status could see more strength over the coming weeks, particularly with Japanese investors. The technical picture has resistance now at 105.00 and support at 104.00. A break of 104.00 opens a potentially much deeper correction for USD/JPY.

EUR/USD was almost unchanged overnight at 1.1845, caught between opposing EUR/USD and EUR/GBP flows. Sterling was a star performer, with positive noises from the Brexit trade talks propelling GBP/USD 1.50% higher to 1.3140, from 1.2940. I have previously stated that the risk of no agreement had been woefully under-priced by markets, with trendline support in GBP/USD never threatened at 1.2900, and a sub-1.2000 a possibility. Conversely, it is essential to acknowledge that a Europe/United Kingdom trade agreement would be a very positive development. In such a scenario GBP/USD should quickly rally to its September 1st high at 1.3485 initially, with more gains entirely possible.

The PBOC set another robust fix today for USD/CNY at 6.6556, its lowest since July 11th, 2018. With the PBOC clearly comfortable with an appreciating CNY backed by yield carry and economic performance, the outperformance of the CNY and regional Asian currencies look set to continue. Asian currencies’ relative immunity to the risk concerns emanating from the US and Europe thus far suggests that any sell-off from a stronger US dollar, as we advance, will be limited in nature.

The US dollar has risen in Asia, notably versus the Australian and New Zealand dollars which inexplicably outperformed overnight. Asia appears to be pricing in increasing risks around the US stimulus progression and the final presidential debate tomorrow, both of which were ignored by Wall Street. I expect the US dollar to find plenty of support on dips over the next week, but its strength will be seen mostly in the G-10 space, with Asia outperforming on a relative basis.

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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