US dollar rallies once again

FOMC minutes, PCE boost dollar

The US dollar rallied once again overnight after a more hawkish tone to the FOMC minutes and higher than expected PCE data. Some pre-holiday risk-hedging buying may also have flowed through currency markets with the US dollar being the market’s favourite way to play the inflation/Fed-taper trade at the moment, especially with the euro languishing under a virus cloud. The dollar index rose by 0.35% t0 96.86 but has eased back to 96.75 in Asia as US stock index futures continue to rally. With volumes sure to be muted for the rest of the week, the US dollar remains vulnerable to a downside correction, with the dollar index’s relative strength index (RSI) remaining in very overbought territory. Nevertheless, the index remains a buy-on-dips and could well move through 97.00 into next week.

Interestingly, despite a flattening of the US yield curve overnight, USD/JPY continued to move higher, rising 0.25% to 115.40, which, in my mind, reinforces the upside bias to the cross. Resistance is nearby at 115.50 and a rise through that opens the door to 118.00 in the coming weeks, assuming US yields remain firm. Support remains at 115.00 and 113.50.

EUR/USD retreated in the face of US dollar strength once again overnight, weighed down by dovish ECB officials and virus restriction concerns. The single currency fell 0.43% to 1.1200 overnight before climbing to 1.1415 in Asia today. It remains on track to test 1.1160 this week. That in turn sets up a potential retest of 1.1000. Only a reversal of US yields lower alleviates the negative outlook, although the Covid-19 situation will cap any gains. GBP/USD fell in sympathy, easing 0.37% to 1.3330 before rising to 1.3345 in Asia. Short-covering, like the euro, is likely to be temporary and sterling remains vulnerable to a test of 1.3300, being guilty by geographic association with the euro.

The Australian and New Zealand dollars eased overnight, AUD/USD falling 0.45% to 0.7200, and NZD/USD tumbling by 1.10% to 0.6870 as markets voiced their disappointment over the 0.25% hike yesterday by the RBNZ. A cautious risk sentiment atmosphere, with the US on holiday, is likely to cap any gains in either currency. Both are in danger of retesting 2021 lows at 0.7100 and 0.6800, respectively, with the kiwi the more vulnerable of the two with no RBNZ meeting until February.

The PBOC set a weaker yuan fixing at 6.3980 today, adding another CNY 100 billion in liquidity via the repos. However, USD/CNY refuses to take the bait with USD/CNY trading OTC at 6.3880 and remaining anchored below 6.3900. That continues to provide some support to regional Asian currencies, which mostly traded sideways overnight and today. One exception is the Malaysian ringgit which has fallen 0.40% to 4.2260 today. The Korean won is holding steady at 1189.90 the Bank of Korea policy hiked rates by 0.25% with a hawkish outlook. USD/Asia dips should find plenty of support if the USD/MXN price action overnight is anything to go by. We could see a couple of days of consolidation though before the US dollar uptrend resumes next week.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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