The US dollar rallies on month-end flows

US dollar calm in Asia trading

The US dollar powered higher on Friday night, supported by inflows from international investors loading up on US treasuries in month-end rebalancing flows. That also had the effect of pushing US yields lower as the bond market ignored the Kaplan taper comments. The dollar index powered higher by 0.73% to 91.30 in New York, where it remains today in Asia.

With mainland China and Japan away today, currency flows will be muted, and we may have to wait until Europe’s arrival to see if the US dollar rally was a one-off month-end related phenomenon. I suspect the answer is yes, and the dollar index will struggle to rise above 91.50, especially if US bond yields remain subdued and ahead of a substantial data calendar this week.

That said, if US dollar strength persists this week, that will set up some potentially painful downside technical correction versus developed market currencies, but less so versus Asian ones. Most of the US dollar strength was expressed in the DM space on Friday, with Asian currencies only modestly retreating and remaining unchanged today.

EUR/USD fell 0.80% to 1.2020 on Friday, with GBP/USD falling by 0.95% to 1.3820. The risk barometer Australian and New Zealand dollars had a torrid session. AUD/USD fell 0.75% to 0.7715, while NZD/USD fell 1.10% to 0.7160. NZ Prime Minister Ardern’s comments on the difficulty of the relationship with China this morning probably leave the kiwi a sell on rallies to start the week.

From a technical perspective, daily closes under 1.2000 by EUR/USD and 1.3800 by GBP/USD suggest that both have another 100+ points of downside in them. Similarly, both AUD/USD and NZD/USD are testing their 100-day moving averages today and closes below 0.7700 and 0.7150 warn of more downside pain. Having all been primary recipients of US dollar largesse in April, it is logical that they have the most to lose; USD/JPY has already retraced most of its recent sell-off. Much depends on whether Friday’s move is a one-off. We should have that answer by tomorrow morning after the gnomes of Wall Street have done their worst.

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