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Dollar divergence

Euro steady, pound and yen show gains

The dollar index was barely changed overnight, finishing just 0.05% lower at 90.00, nestled near to the top of its weekly range. That belied the offsetting moves within its components, though. EUR/USD is almost unchanged at 1.2190. Still, GBP/USD rose strongly by 0.60% to 1.4200 as investors continued to bet on the UK recovery and with dialling down of Northern Ireland Brexit Protocol tension overnight.

 

Meanwhile, USD/JPY rose 0.65% to 109.85 as the divergence between the US, and Japan inflation trajectories raised expectations of a widening interest rate differential. Fears over the trajectory of Covid-19 in Japan and the potential cancellation of the Olympics also weighed on yen. The break higher overnight sets up USD/JPY for a move through 110.00 and onto 111.00 next week, especially if US data tonight has an inflationary tone to it.

 

The North/South divide in Asia is making a reappearance, with the PBOC setting the yuan at a near two-year high of 6.358 this morning versus the US dollar. That has lifted the currencies of neighbouring South Korea and Taiwan and comes after the PBOC made it easier for financial institutions to secure off-shore funding for their balance sheets. The yuan, the KRW, and NTD are also benefitting from international investor inflows into the local equity and bond markets. Until the PBOC signals its displeasure or US yields push the greenback higher, the yuan will continue its appreciation path.

 

By contrast, ASEAN currencies remain locked in much tighter trading ranges. Much of this can be laid at the door of Covid-19, with the entire region now engaged in virus struggles to greater or lesser degrees. Offsetting that is the pace of the global recovery in the northern hemisphere and the potential of large-scale US fiscal spending flowing into those markets.

 

The US dollar is steady in Asia as markets take a wait-and-see attitude ahead of the US data dump and budget tonight. If those releases set an inflationary tone, nerves may see a rotation into the greenback at the end of the session. I expect currency volatility to ratchet higher next week when we get a heavy schedule of tier-1 data releases from across the globe.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley [4]

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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