US dollar extends gains

The US dollar rally resumes, boosted by energy

New York spent the overnight session in risk aversion mode, and you can take your pick from a menu of reasons why. The Fed taper and higher US bond yields, legislative fixture congestion, and the US debt ceiling now that the Senate is in recess, fears that US and global growth are slowing, the list goes on. The fact that energy prices are surging, and that internationally, most is priced and transacted in US dollars seems to have been overlooked, but logically, higher energy prices mean more US dollars need to be bought.

Uncertainty and the underlying current that the Fed backstop is drawing to a close saw the US dollar rise overnight, the dollar index rose 0.27% to 94.36 where it remains in Asia. The index has well-denoted resistance between 94.45 and 94.50, just above, which has capped rallies over the past 10 days. A daily close above 94.50 will signal the next leg of the US dollar rally is in play. Only a fall through 93.50 changes the bullish outlook temporarily.

The EUR/USD recovery has been capped at 1.1600 and the single currency has eased back to 1.1555 in Asia. A combination of high energy prices and a rising yield differential will crimp the euro from here and a fall through 1.1500 signals the next stage of its retreat. Likewise, sterling has failed ahead of 1.3650 and has fallen to 1.3595 in Asia. The possibility of a Bank of England hike in November appears to be priced into sterling for now and more pressing domestic issues will now drive price action. A fall through 1.3550 signals a retest of 1.3400 but a BOE hike will at least provide some support, especially versus the EUR.

The yield differential play was there for all to see in USD/JPY overnight, as was the impact of higher US dollar-priced energy on Asia. USD/JPY leapt 1.0% higher to 113.35 overnight where it remains in Asia today. USD/JPY has now risen nearly 200 points in just two days. The rally will depend on US bond yields this evening in New York, but a test of 114.00 appears imminent. Both the Australian and New Zealand dollars remained steady overnight, in no small part due to the upside breakouts in AUD/JPY and NZD/JPY. That will provide a modicum of support going forward to both Antipodeans even if the risk-sentiment atmosphere globally continues souring, leading to US dollar buying.

China continues to hold the USD/CNY steady around 6.4500, with one eye on its imported energy bill. Elsewhere though, regional currencies are in retreat. USD/KRW has risen 0.30% to 1199.00 today despite the BOK threatening intervention. We will hear many such statements from across the region going forward. USD/IDR and USD/MYR have risen modestly in Asia and are regional outperformers thanks to booming energy and commodity prices. That should continue shielding them from the worst of the upcoming US dollar rampage. The baht has risen by 0.45% today on the tourism reopening news, but I expect its day in the sun to be fleeting.

The Indian rupee sank again overnight, USD/INR rising of 75.40 as of this morning. India remains amongst the most vulnerable to the coal and oil squeeze, and if inflation prints above 5.0% tonight, the RBIs stagflationary policy settings will sink the currency once again.

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