Dollar eases on debt ceiling agreement

The US dollar edges lower on Senate debt deal

The US dollar gave back some of its recent gains overnight after a short-term US debt ceiling compromise increased investor risk appetite and a rotation out of US dollars. The dollar index finished only slightly lower though, falling just 0.04% to 94.20, thanks in part to weak German data eroding the euro. In Asia, the index has resumed its climb, rising to 94.26. Overall, my expected range of 93.50 to 94.50 has held well through the week.

Currency markets continue to take a less reactionary stance than equities, helped in part, by US yields remaining stubbornly at the high end of the week’s ranges. That suggests that currency markets and bond markets are taking the threat of a Fed taper rather more seriously than the equity space and that tonight US data will be pivotal. A high print should see the dollar index retest 94.50 and rise into next week. Conversely, a disappointing print will delay taper expectations and lead to short-term US dollar weakness.

Weak German data capped EUR/USD overnight and saw EUR/GBP sold heavily. EUR/USD remains near the bottom of its weekly range, at 1.1500 this morning. The single currency remains vulnerable to more US dollar strength and robust employment data tonight sets up EUR/USD for another move lower targeting 1.1400 next week. Resistance at 1.1600 and 1.1650 look safe for now. GBP/USD continues to flirt with its breakpoint point, trading at 1.3610 in Asia. The rally by sterling is mostly due to EUR/GBP selling, driven by weak German data and hawkish comments from UK officials. Rallies toward resistance at 1.3650 have been well contained and strong US data tonight could see sterling’s sell-off resume. USD/JPY has continued creeping higher to 111.85 today as US yields remain anchored at recent highs, ignoring the short-term exuberance in equity markets over the debt ceiling compromise. A weekly close above 112.00 will signal further losses for the yen into next week.

AUD/USD and NZD/USD have risen modestly to 0.7310 and 0.6930 as investor caution ebbs after the debt ceiling compromise.  Both remain vulnerable to a firm US Non-Farm print tonight if that swings market opinion back to the Fed taper. With Covid-19 cases spreading and rising in New Zealand, which is tempering RBNZ hiking expectations, the kiwi looks the more vulnerable of the two. Strong US data could see NZD/USD retest 0.6800 next week.

The return of mainland China markets has passed with a whimper, with the PBOC adding just CNY 10 bio of liquidity and setting a neutral USD/CNY fixing at 6.4604. Onshore CNY is trading on the firmer side of the fix at 6.4500 today, lending some support to regional Asian currencies which have suffered at the hands of a stronger US dollar this week. One notable exception is USD/INR, which has continued firming overnight and this morning ahead of the RBI policy decision shortly. Forex markets look poised to sell INR once again if the RBI remains fully on hold, and a test of 75.000 looms into the end of the week. Once again, Asian currencies face a very binary outcome once US employment data is released. On hold today ahead of the data, a high Non-Farm print will resume the downward pressure on Asia FX, while a weak number will provide some short-term relief.

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