US dollar on a roll

The US dollar steamrolls everything

The US dollar leapt higher versus DM and EM currencies overnight although it is hard to attribute the sudden acceleration to any one input. Month and quarter-end flows could be distorting markets. Equally a pricing in of a Fed taper and higher US yields, or hopes that a debt ceiling deal will be reached could equally be to blame. The US dollar may also be receiving inflows related to its bond market or from haven buyers nervous about negative developments around the world. You could take your pick from any or all of that smorgasbord as a reason to buy USD, but when looked at in totality, you would struggle to find a reason to sell the greenback and perhaps that is part of the answer. For this pilot fish of the world’s capital markets, I am content to mumble “I love it when a plan comes together.”

The dollar index powered 0.68% higher to 94.36 overnight, a huge move. Although easing slightly in a dull Asian session to 94.27, there appears to be no sign of the rally losing steam. The index reached 11-month highs overnight and technical indicators suggest it may be overbought in the near term. That could see some consolidation today, but I anticipate a test of 94.75 by early next week.

EUR/USD has fallen by 0.75% and is flirting with major support at 1.1600 this morning. Rallies should be limited to 1.1670, but a daily close under 1.1600 signals a much deeper decline is in play, potentially reaching 1.1200. GBP/USD fell 1.20% to 1.3435 overnight before recovering to 1.3455 in Asia. Britain faces its own energy and supply chain winter of discontent and has already tumbled through 1.3610 this week. Nearly 200 points lower now, the charts still indicate further losses targeting 1.3200 in the days ahead. USD/JPY has risen 0.40% to 111.85 and as a US/Japan yield differential play, could extend gains to 114.00.

Always vulnerable to a heightened fear environment in financial markets, the Australian and New Zealand dollars were stretchered off the field overnight, falling by 0.80% and 1.30% respectively. Fears over a Kurt Russell moment and a potential Covid-19, Escape From Auckland are weighing on the kiwi heavily in the background. Both currencies have rallied today on the US funding news and the rallies in commodity prices, notably iron ore. AUD/USD has risen 0.40% to 0.7205, and NZD/USD had risen 0.25% to 0.6885. With the US dollar resplendent though, and plenty of reasons around the world to be nervous generally, both remain acutely vulnerable to heightened fear sentiment returning. Only moves above 0.7250 and 0.69050 would alleviate that.

The PBOC set a slightly weaker fixing for the CNY today at 6.4854, although in open market trading the CNY continues to trade firmer at 6.4640 with officialdom, perhaps with one eye on imported energy costs, keen to ensure the CNY goes into the week-long holiday on a firm note. Regional currencies though are under pressure and if indeed the US dollar move overnight was a Fed taper response, will continue to do so. As I have stated repeatedly, a disconnect between Asian and US monetary policy has negative implications for most countries in the region unless they want to start burning through foreign currency reserves.

Some of that may be occurring today with USD/KRW topping out at 1188.00, once again suggesting that the Bank of Korea doesn’t want 1190.00 to break for now. Similarly, the Philippine peso, logically one of the more vulnerable currencies, with stagflationary monetary policy and plenty of overseas borrowings, is finding it hard to breach 51.00. The BSP could be on top here for now. The Indonesian rupiah is in much the same boat and USD/IDR is starting to rise today, climbing to 14,300.00. USD/INR, also with reference rates well below inflation like the Philippines, has risen steadily this month and accelerated in the last few days. INR may have been temporarily boosted by investor inflows that left China and India’s hot IPO market. If that has abated, a stronger US dollar and higher US yields will weigh heavily on the INR. USD/INR rose to nearly 74.400 overnight and if the US dollar stays strong, could revisit 75.000 sooner rather than later.

The Thai baht is in a similar boat and along with PHP, IDR and INR, remains highly sensitive to higher US yields and a Fed taper. USD/THB has risen to 33.914 and unless the BOT is on the offer at 34.000, looks set to book more losses in the week ahead. USD/MYR will also have a serious monetary policy disconnect, although high oil prices and an economic reopening seem to be shielding the ringgit from the worst of the US dollar rally. Nevertheless, USD/MYR has risen to 4.1880 as of today, and a close above 4.1900 tomorrow signals a move higher to 4.2200 initially.

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