Dollar retreats against Asian currencies

The US dollar falls in Asia

The US dollar is in retreat in Asia versus both developed market and regional currencies.  That followed a sideways overnight session where the dollar index closed almost unchanged at 93.95. The index has headed south today, tumbling by 0.28% to 94.68, taking out support at 93.70. It could now target its key pivot point at 93.50. News is thin on the ground to explain the US dollar’s broad fall in Asia today. But a series of reports lifting and bringing forward hiking expectations in the UK, Europe, Australia, and New Zealand could be taking the wind out of the Fed taper trade. The dollar fall appears to have sparked some technical breakouts as well which are probably attracting algorithmic fast money.

EUR/USD has jumped through resistance at 1.1625 to rise 0.32% to 1.1650 and could extend gains to 1.1700. GBP/USD is 0.30% higher at 1.3765 and is testing resistance at these levels. A rise through 1.3780 would signal a retest of 1.3900 in the coming days. Notably, USD/JPY has remained above 114.00 at 114.10 today, almost unchanged. The US yield curve flattened overnight, but that was led by a rise in short-dated tenors. USD/JPY remains entire a US/Japan rate differential play although a fall through 114.00 could see a quick spike lower to 113.50.

As risk sentiment has improved in Asia today, AUD/USD and NZD/USD have leapt 0.55% higher 0 0.7450 and 0.7125, respectively. A lot of talk is circulating about changed RBA guidance to the tighter policy settings and a potential 0.50% hike by the RBNZ in November. There is also no doubt that sectors of both economies, notably New Zealand, are showing signs of serious overheating. AUD/USD could gain to 0.7600 this week, and NZD/USD to 0.7200 if the hawkish sentiment remains.

In Asia, USD/CNY has slumped by 0.30% to 6.4100, the highest level for the yuan against the US dollar since June. The PBOC is showing no signal in its daily fixings that it wants to halt yuan strength and given the probable size of its imported energy bill in the coming months, I don’t blame them. The CNY strength, part of a general US sell-off today, sees regional currencies also rallying, notably the KRW, THB, INR, PHP, and SGD, i.e., the local currencies most under the hammer over last week. By contrast, the resource-facing IDR and MYR are almost unchanged although Malaysia has a national holiday today, muting trading, and Indonesia has a central bank policy decision this afternoon. The price action is suggestive that much of the gains are fast-money flows that will run for the exit at the first sign of trouble, China excepted.

As I mentioned yesterday, we are starting to see a pattern emerging in the developed market space of currency outperformance from those on a nearer-term hiking path. Great Britain, Europe, Australia, and New Zealand longer-dated yields have firmed this week, giving markets a temporary respite from US dollar strength. The key remains the Fed taper and we have five Fed speakers this evening and hopefully, even more, taper clarity. Ever rising energy prices support the US dollar as most international energy is priced and transacted in US dollars. 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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