Risk-aversion boosts the US dollar

US dollar gains on political risk

The overnight theme was definitely one of risk reduction, with US Treasuries rallying and the US dollar rising. The dollar index rose 0.30% to 92.74 overnight, with the euro a notable underperformer. EUR/USD fell 0.40% to 1.1810 overnight, as markets unwound stimulus trades and Covid-19 running rampant across the continent raised fears of the dreaded double-dip. The Canadian dollar found itself guilty by association with the US, falling 0.70% to 1.3215 versus the greenback.

Despite all the noise overnight, in the bigger picture, most G-10 currencies are now parked in the middle of their 2-month ranges. The exception being USD/JPY, where yen repatriation flows still threaten a test of 104.00 in the coming week. Further US dollar strength is to be expected this week as nerves over the US election and stimulus increase, and pro-cyclical trades are reduced. Fellow havens, the Japanese yen and Swiss franc, should outperform their peers though, with EUR, AUD, CAD and NZD the most vulnerable.

In Asia, the story is somewhat different. Asian currencies continue to outperform Korean won moving to 18-month highs again today at 1127.00, and sure to prompt more heavy selling intervention by the central bank. USD/CNY has moved higher to 6.7000 in the past few days but is only modestly of its recent 6.6500 lows. The Philippines peso, Singapore dollar, Malaysian ringgit and Thai baht all remain at recent highs or close to them.

The positive China story and a strong yuan are clearly the sources of most of Asia’s currency strength, with their high beta to the regional giant. Economic data continues to surprise to the upside as well, with Singapore’s Industrial Production yesterday climbing an impressive 24.2% YoY in September, boosted by pharmaceuticals and electronics exports. Asia will not be immune to a slowdown in Europe and the US, but China’s outperformance continues to isolate the region partially. I continue to expect outperformance by Asian currencies in 2021, although they will almost certainly see some risk reduction pressures this week ahead of the US election.

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