The dollar index finished almost unchanged at 94.00 overnight but that hide what was quite a choppy session. The index slumped to 93.75 intra-day as risk sentiment leapt higher in markets but retraced all those losses by the session end. With US data and earnings supporting investor sentiment for now, the dollar index looks vulnerable to more softness assuming no negative surprises this evening. The fact that it managed to finish unchanged overnight suggests that its yield-driven, taper-expectation strength remains intact. The dollar index could revisit the overnight lows at 93.75 today, but only a weekly close tonight under 93.50 suggests a deeper correction. Heavy speculative long US Dollar positioning in the futures markets is likely to limit gains today as nervous longs look to exit ahead of the weekend.
The US Dollar has eased in Asia, pushing EUR/USD and GBP/USD 0.10% higher to 1.1610 and 1.3687. EUR/USD remains rangebound between 1.1550 and 1.1650, but GBP/USD has risen through resistance at 1.3680. With more hawkish comments coming from BoE officials still, a retest of the overnight highs at 1.3730 are a possibility, with a weekly close at that level signalling a test of 1.3800 next week. One note of caution on US Dollar weakness is USD/JPY, which has continued to rise to a 22-month high at 113.90 today. The yield differential play is very much alive and a test of 114.50 seems likely next week. Buying of GBP/JPY, AUD/JPY and NZD/JPY is often used to reflected positive sentiment in currency markets and should mean USD/JPY dips remain shallow.
AUD/USD and NZD/USD rode the waves of improved investor appetites overnight. AUD/USD rising 0.50% to 0.7415, its 100-day moving average (DMA), where it remains in Asia. NZD/USD was the star of the night, jumping 1.0% to 0.7035, boosted by a huge jump in its September PMI to 51.70% early this morning. It has climbed again to 0.7050 in Asia with 0.7100 its next technical target. The PMI is a strong statement that business confidence remains high despite Auckland’s deepening Covid-19 woes. Off course, if global investor sentiment heads south into the weekend, both antipodeans will likely unwind all of the overnight gains as quickly as they appeared.
In Asia, the PBOC returned to a neutral USD/CNY fixing at 6.4386 today after modestly weaker CNY fix yesterday. That seems to have done its job with USD/CNY hovering around the fix level at 6.4370, having traded a lot lower in the band recently. It seems that the PBOC’s subtle hint about excessive CNY strength has been heeded by local markets. Nevertheless, I am not expecting a weakening trend to emerge, as export price elasticity is likely rising along with China’s imported energy bill.
The Korean Won has strengthened today after the Bank of Korea spent the week sell dollars to defend the 1200.00 level. The Bok’s Lee said that a November rate hike is possible, and USD/KRW has retreated to 1181.50 as a result. USD/KRW staged a notable downside break through support at 1190.00 yesterday and the worst is probably over for the Won for now. Regional currencies are also stronger today as improved international sentiment weakens the US Dollar.
The CFTC Commitment of Traders report is likely to reveal heavy US Dollar long positioning versus the major currencies still. Some culling of that lop-sided open interest is probably necessary before the US Dollar rally resumes. However, the Fed taper will still rule the roost in Q4, along with increasing uncertainty around energy markets and inflation. That will maintain the supportive environment for US Dollar strength through Q4.
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