Currency markets stuck in neutral

Dollar edges higher on risk aversion

The Biden capital gains tax headline prompted a modest wave of risk aversion in New York overnight, lifting the US dollar even as US longer-term yields continued to ease slightly. Biden announced a tax hike on the “rich”, which would mean raising the top marginal rate and increasing the capital gains tax. Of course, it’s reasonable to assume that there will be plenty of give-and-take in Congress over this ambitious proposal.

The risk barometer Australian and New Zealand dollars retreated by 0.60%, but the dollar index rose just 0.18% to 91.27%. Sterling was the worst performer among the majors, GBP/USD falling 0.65% to 1.3840 on EUR/GBP buying post ECB.

EUR/USD and USD/JPY were almost unchanged from the previous days, and despite the noise in the risk-sensitive Commonwealths, the G-10 grouping, and the dollar index enter the last day of the week, still trading within their narrow weekly ranges. The bullish falling wedge formations on EUR/USD, GBP/USD, AUD/USD and NZD/USD all remain intact.

That state of affairs is set to continue into the close tonight unless US long-dated Treasury yields stage a sudden significant move. The data calendar over the next two weeks thickens up substantially, with an FOMC meeting next week. The Covid-19 situation in India and places elsewhere should also resolve more clearly, for better or worse, over the next fortnight. That will allow currency markets to more readily price in a continuing global recovery, or a delayed one. Or, more accurately, the US bond market to do so.

In Asia, regional currencies continue to remain firm, with the PBOC USD/CNY fixing almost unchanged from yesterday. The China FX Regulator also stated that the yuan exchange rate remained stable. With little to move currency markets on the horizon today, regional currencies look content to glide into the weekend.

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