US dollar gains ground
The US dollar continued its uneven move higher overnight, notably versus the euro. That pushed the dollar index 0.24% higher to 91.24, although some of those gains have been unwound this morning as equity markets rally in Asia. The dollar index remains above the 91.00 former resistance level, signalling more increases ahead, initially targeting the 100-day moving average (DMA) at 91.90.
Although USD/JPY is consolidating its gains around the 105.00 area, the euro and Australian dollar look the most vulnerable to further US dollar strength. EUR/USD closed below support at 1.2055 overnight, falling 0.13% to 1.2043. It should target its 100-DMA at 1.1955 and then 1.1900. If the European outlook darkens and the US stimulus makes good progress, further falls by EUR/USD to 1.1600 cannot be ruled out.
AUD/USD finally broke its support line at 0.7610 yesterday, falling 0.19% to 0.7605. It continues to flirt with the support line this morning, and the daily close was not yet a strong enough bearish signal to call for a more extensive retreat. However, falls in copper and iron ore prices will not bode well, coming after a very dovish RBA yesterday. Another day close below 0.7610 should signal more losses to 0.7450.
Surprisingly strong employment and wage data from New Zealand today have lifted the New Zealand dollar and removed immediate downside concerns. It has now risen 0.83% in the last two sessions to 0.0715. NZD/USD has formed a symmetrical triangle bound by 0.7135 and 0.7225. A daily close above or below the triangle boundaries gives a binary 250-point outcome, with additional strength looking as the more likely outcome as of this morning.
In China, currency markets have shrugged off the Services PMI data. Instead, they are focusing on the net 80 bio CNY liquidity withdrawal by the PBOC via the repo market this morning. Following a stronger CNY fix at 6.4669, the tighter conditions have seen USD/CNY hold firm at 6.4600 today. USD/CNY now has a clearly denoted 6.4000 to 6.5000 trading range. Unless it moves markedly higher through 6.5000, Asian regional currencies will continue to resist the dollar strength elsewhere and stay firm. With Lunar New Year just around the corner, I suspect the PBOC has USD/CNY just where it wants it into the holidays.