The US dollar rallies
The US dollar staged an impressive rally overnight, with major currencies and the cyclical Commonwealth dollars once again wilting. The dollar index rose 0.44% to 90.98, just below two-month resistance in the 91.00 to 91.20 zone. Profit-taking has seen it edge lower to 90.90 today. A potentially scaled back US fiscal stimulus package seems to have lifted the dollar on a day that US yields actually fell. It is also reflective of the size of the US dollar shorts out there that the greenback has performed so well in the past few sessions. That said, I would prefer to see a daily close above 91.20 before calling for further US dollar gains to 92.00 initially.
The euro continues to bear the brunt of dollar strength, with fears of a double-dip recession caused by its poor vaccine rollouts and ham-fisted policy response to that problem. EUR/USD tested support at 1.2050 overnight on its way to a 0.60% fall and a close at 1.2056. Some profit-taking has lifted the single currency to 1.2075 today, but the risks have increased now of a material correction lower that would target 1.1900 initially.
In the cyclical commodity currencies, a dovish RBA has pushed AUD/USD back towards support at 0.7610, and a deeper correction targeting 0.7400 remains a real possibility. NZD/USD has fallen to 0.7170 this morning with critical support at 0.7110. Meanwhile, USD/CAD has risen to 1.2835, just below its 10-month downtrend, today at 1.2855. Failure targets 1.3000 initially and could extend as far as 1.3400 if the greenback short squeeze finds renewed momentum.
China today, added another CNY 80 billion in liquidity via the 7-day repo, which remained steady at 2.20%—combined with a slighter softer PBOC USD/CNY fix—allowed USD/CNY to hold onto its 0.60% gain overnight, trading at 6.4600 this morning. USD/CNY has a series of clearly denoted highs at 6.5000, stretching back through the whole of January. Asian currencies remain tied to the yuan’s event horizon, thus resilient in the face of US Dollar strength. If USD/CNY rises through 6.5000, both the CNY and regional Asian currencies may enter a phase of catch-up weakness.