Dollar higher despite dovish Fed
The US dollar rallied overnight despite a dovish FOMC, in what looks like a combination of a short-squeeze and risk aversion flows into the US bond market. Notably, most of the dollar strength appears to be against the major and commodity currencies, and not emerging Asian currencies, which have held their ground overnight and today. That further suggests dollar strength could be temporary and that we are not on the verge of a change in trend.
The dollar index rallied 0.53% to 90.65 overnight, leaving it still trading in the middle of its 3-week 90.00 to 91.00 range. This morning, it has risen another 0.13% to 90.75, driven by weakness in the Japanese yen and the euro. The overnight price action has left an intriguing technical picture with a daily close above the 91.00 resistance, opening up further gains to 92.00 initially.
Among the majors and commodity currencies, the technical picture suggests the chances of a larger US dollar short squeeze have risen markedly. EUR/USD has fallen to 1.2090 today, with a loss of support at 1.2040 possibly extending to 1.1800. USD/JPY has risen through its 9-month downtrend at 104.35 today. A breakout through its nearby 100-day moving average (DMA) targets 105.70 initially, its 200-DMA.
The Australian dollar has fallen 1.60% in the last 24 hours to 0.7625. A loss of 0.7600 targets 0.7400. The New Zealand dollar has fallen by 1.40% in the past 24 hours to 0.7135, just above support at 0.7100. A failure of 0.7100 targeting an initial move lower to 0.7000. With their high beta to the vaccine-led recovery story, the FOMC’s vaccine caution overnight has left them and the Canadian dollar especially vulnerable to further US dollar strength.
Asian currencies are surprisingly resilient, suggesting that the dollar short unwind is confined to the developed market space for now. The USD/CNY rose only 0.30% overnight and is unchanged at 6.4800 this morning. The Singapore dollar and Indonesian rupiah have eased 0.25% today, but the Malaysian ringgit, Thai baht and Philippine peso are unchanged. It will likely take a series of weaker CNY fixes by the PBOC to make the rest of Asia blink.
Only the Korean won is looking vulnerable today. USD/KRW has been weak of late anyway, thanks to aggressive Bank of Korea intervention. The won fell has fallen 1.20% in the past 24 hours, and USD/KRW has risen through resistance at 1110.00 to 1115.30 today, just shy of resistance at 1120.00. A loss of 1120.00 could extend the dollar rally to 1140.00.
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