The US dollar treads water

Dollar trading sideways

The US dollar continued to tread water versus the major currencies on Friday. The dollar index maintaining a 94.00 close for the third day in a row. EUR/USD remains unchanged at 1.1590, while sterling strength was offset by yen weakness in the index. Early selling pressure on the US dollar was alleviated as US yields firmed across the curve after the strong Retail Sales data on Friday.

While EUR/USD trades sideways at 1.1590, the sterling continues to rally versus both the greenback and the euro. GBP/USD rose by 0.56% to 1.3750 on Friday before easing to 1.3740 in Asia, despite hawkish rhetoric over the weekend by the BoE Governor. Sterling’s strength is based on ever-rising hiking expectations and a rally through 1.3775 opens a retest of 1.3900. Only a fall through 1.3700 changes the bullish outlook. USD/JPY rose 0.56% to 114.20 on Friday after resistance at 113.80 gave way. With US yields firming across the curve the only way was up for USD/JPY. In the absence of any haven buying of yen from domestic investors, USD/JPY remains at the mercy of the US/Japan rate differential and a test of 115.00 is likely this week.

Elsewhere, the improvement in investor sentiment on Friday after the Retail Sales data saw the US dollar mostly retreat. AUD/USD remained firm at 0.7410, but NZD/USD rose 0.55% to 0.7070 on RBNZ hiking expectations. Today’s New Zealand inflation print boosted the kiwi to a high of 0.7105, as that noise increased. However, all those gains have now gone as spiralling Covid-19 cases in Auckland have led to speculation that the Auckland region (New Zealand’s largest population centre) could re-enter level 4 lockdown this afternoon. A government announcement is expected at 1600 NZT. With a lot of speculative longs out there, NZD/USD could fall quickly to 0.7000 if a tightening of restrictions is announced.

Regional Asian currencies also enjoyed a positive back end of last week thanks to a weakening US dollar and some judicious intervention by a few regional central banks. The Malaysian ringgit and Indonesian rupiah have outperformed thanks to high energy and commodity prices as well firmer investor risk sentiment. This week looks rather less clear though as despite US equities rallying on Friday, US yields also firmed across the curve. If that status quo remains, or yields move higher, the pressure will once again come on ASEAN currencies as well as the yen and the won.

In the bigger picture, we are starting to see a pattern emerging in the developed market space of currency outperformance from those on a nearer-term hiking path. The key remains the Fed taper and the list of Fed speakers this week will probably give more clarity in this respect. Ever rising energy prices are also supportive of the US dollar. I am still expecting prolonged US dollar strength in Q4, although this week, may see more sideways action as speculation long US dollar open interest is culled.

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