The US dollar retreats post-Fed

Dovish Fed weighs on US dollar

The US dollar quickly unwound all this week’s gains after the FOMC remained consistent in its dovishness. The dollar index fell by 0.46% to 91.44, levels last seen at the end of last week. Interestingly, as the stock market rally has ebbed, the index has climbed back to 91.51 in Asia as US 10-year futures fall by 0.20%, suggesting the mechanical linkage remains as strong as ever.

Notably, USD/JPY remained anchored around the 109.00 level, but both EUR/USD and GBP/USD managed to lift themselves well clear of technical danger zones. EUR/USD at 1.1960 is well above its 200-day moving average at 1.1840. GBP/USD has risen to 1.3940, climbing back into its multi-month rising channel.

Commodity currencies were unsurprising winners overnight. Both the Australian and New Zealand dollars rose by 0.65% to 0.7795 and 0.7240, respectively. The Australian dollar has risen another 0.30% to 0.7820 today after the employment data, and both Antipodeans are testing resistance at these levels today, following recent downside breaks. Strong energy and commodity prices have moved the Canadian dollar back into a bull market in no uncertain terms. USD/CAD tested long-term resistance around 1.2700 early in March but has since fallen to 1.2410. With the loonie bull market resuming, USD/CAD should fall to 1.2250 and then 1.2000 in the weeks ahead.

Asian currencies all booked strong gains overnight. In the Korean won’s case, it was enough to stir some belligerent “watching closely” type comments from the Bank of Korea this morning. Asian central banks are more likely to be concerned about the pace and not the size of the local currency appreciation. Much of that will be because although the Chinese yuan has moved higher, its gains have been modest, with the PBOC seemingly comfortable with USD/CNY around 6.5000. Indonesia will be relieved that USD/IDR has fallen to 14,400.00. Still, elsewhere, any regional currency diverging higher too quickly from the CNY event horizon is likely to run into central bank “smoothing.”

Although the US dollar fell overnight across the board, it has only unwound this week’s gains, with the USD/CAD a notable exception. The small move lower by US 10-year futures in Asia has provoked an immediate bout of modest US dollar strength today. That suggests that currency markets remain in thrall to developments in the US bond market.

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