Dollar dips against Asian currencies

Firm yuan setting pushes US dollar lower in Asia

Friday was a choppy session for currency markets with the US dollar on the back foot most of the day before staging a post-Non-Farm taper rally as US bond yields moved north. The dollar index finished just 0.10% lower at 94.10, edging to 94.08 in a dull Asian session. The dollar index is now back to the middle of its 93.50 to 94.50 range. Despite higher US bond yields, the technical picture suggests that resistance around 94.50 became more imposing after multiple forays were repelled ahead of it last week.

I also note that the CFTC Commitment of Trader’s Report showed US dollar longs hitting two-year highs. That is as good a sign as any that speculative momentum has slowed over the end of the last week. I still believe in the higher US dollar/Fed-taper story, and higher yields will provide an underlying bid on dips. But it would not surprise me in the least if the US dollar spent this week on the softer side to cull some of the heavily overweight speculative long interest.

In the G-10 space, EUR/USD continues to mark time, rising slightly to 1.1580 in Asia. EUR/USD still looks vulnerable to another move higher in US yields, but a break of 1.1550 or 1.1650 is required to signal a new directional move. Sterling is outperforming after two Bank of England officials signalled an earlier rate hike could occur over the weekend. The November BOE meeting will be interesting now as inflation pressures mount that don’t look transitory anymore. GBP/USD has risen 0.37% to 1.3665 today, well above the 1.3615 pivot point. A rally through 1.3700 could spark a short-squeeze to 1.3800, while GBP/USD now looks well supported into 1.3600.

USD/JPY is on the move after US yields rose on Friday. USD/JPY rose 0.54% to 112.25 on Friday, jumping by another 0.38% to 112.65 in Asia. The culprit is the US/Japan yield differential and this will continue to drive the crosses direction. With the US in taper mode, push up US bond yields, and Japan looking to open the fiscal taps, supported by an ever-dovish Bank of Japan, those forces will continue. USD/JPY looks set to test longer-term resistance between 114.00 and 114.50 while dips to 111.00 will be well supported. Heavily short yen positioning in the US futures may limit USD/JPY gains initially, though. USD/JPY looks like a true buy-the-dip candidate, however.

With Asian markets brimming with confidence today, the sentiment-driven AUD and NZD have risen to 0.7330 and 0.6735 today. AUD/USD has outperformed, rising 0.35% as Sydney’s reopening, and firm commodity and energy prices flow through to the currency. The larger technical picture still looks shaky though, as both Antipodean’s remains completely at the mercy of the ebbs and flows of global risk sentiment. A negative China headline, or a soft US equity session will see both currencies quickly retrace their gains.

The PBOC set a slightly firmer yuan fixing today at 6.4479, while adding CNY 10 billion of liquidity via the repos. The yuan also hit five-year highs on a TWI basis. With one eye on their potential imported energy bill, it is probably no surprise that the yuan has been kept on the firmer side. Although, a RRR cut this morning by the PBOC may make that situation slightly more challenging. The strong CNY has provided support to Asian currencies which have edged around 0.20% higher on average versus the greenback. A procession of reopening announcements by ASEAN markets over the weekend is also lifting recovery sentiment.

A partial US holiday will dull volumes today, but I doubt the Asia FX fairy-tale will continue once they return, and if energy and US yields keep moving higher. Commodity/energy-centric currencies such as the Indonesian rupiah and Malaysian ringgit are, for once, the best places to weather the storm. Huge energy importers like South Korea, Japan and especially India are among the more vulnerable.

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