The US dollar weakens on earnings sentiment
The US dollar has found the going tough this week and fell once again overnight, despite rising bond yields after a weak 20-year auction. With US earnings season outperforming and knocking the Fed taper story from investors’ minds, progress on the much slimmed down Biden fiscal packages, and commodity-centric currencies outperforming, the US dollar remains under pressure. Another driver appears to be rising rate expectations among some trading partners, offsetting the boost from the Fed taper trade. The US dollar looks set to endure more weakness ahead of the weekend and if Evergrande has secured a debt extension, that will probably be another headwind. The dollar index is floating just above support at 93.50, and a further drop to 93.00 cannot be ruled out.
EUR/USD continued to trade sideways around the 1.1650 mark, but the technical picture suggests a move above 1.1670 could extend gains to 1.1800. GBP/USD remains on fire as markets continue to pour into the Bank of England hike trade. Although there is probably a lot of that priced in now GBP/USD continues to rise and momentum remains. GBP/USD is trading at 1.3820 and a close above the nearby triple top at 1.3830 should allow a test of 1.3900 this week. AUD/USD gained 0.50% overnight to 0.7505, boosted by firm prices in the commodity and energy space and expectations the RBA may wind back some of its dovish rhetoric as NSW and Victoria reopen. It continues to target further gains to 0.7600. NZD/USD has been the star of the show with the RBNZ rate hike frenzy in full swing. Kiwi has risen 0.66% to 0.7195 overnight. Kiwi should continue to outperform if global risk sentiment remains firm. NZD/USD could test 0.7300 in the next few days in that scenario.
In Asia, USD/KRW is holding steady at 1177.00 today. Meanwhile, the PBOC remains unconcerned about a strengthening yuan with yet another firm fixing for the CNY at 6.3890. USD/CNY is trading a 6.3940 in Asia having traced out support at 6.3800 yesterday. That continues to support the broader Asia FX space although I expect Evergrande nerves to weigh on regional currencies into the weekend depending on the full implications of the REDD story. Evergrande has another offshore coupon payment grace period deadline next week. I would also note that ever-higher oil prices and China’s moves to cap commodity prices could take the wind out of the Asia FX sails ahead of the weekend but should not be enough to see large-scale exits.
The Japanese yen is seeing haven buying which has accelerated as the Nikkei 225 slumps today. USD/JPY sliding back to 114.00 in Asian trading. It appears that nerves about Japan’s imported energy bill, election uncertainty, and the Mt Aso eruption are temporarily eroding the rate differential bid in USD/JPY. The series of multi-year highs on each side of 115.00 may also be prompting some export selling of USD/JPY. The yield differential play between the US and Japan remains the main driver though, and USD/JPY remains a medium-term buy on dips play.
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