US dollar rises as risk appetite sours
The US dollar rose overnight, responding to deteriorating risk sentiment from omicron, China, Ukraine, or Iran or whichever other headline you wish to pick. The fact that the US dollar correction does not look like continuing into the US inflation data tonight requires some backpedalling from yesterday on my part as well. It appears that currency markets are as vulnerable to headline tennis as other asset classes. It also suggests that markets are less complacent about the US inflation and FOMC stress points than I thought as well. A high inflation print tonight likely leads to more US dollar strength.
The dollar index rose 0.26% to 96.20 overnight where it remains in Asia. It seems unlikely that support at 95.50 will be retested before the FOMC and the odds are rising that a retest of 97.00 will occur next week. Notably, EUR/USD enjoyed only one day in the sun, and gave back all of its gains overnight, falling to 1.1300 today. That is as good a signal as any that US dollar strength is the path of least resistance, even as GBP/USD and USD/JPY held steady.
Muddying the waters overnight was a weaker CNY fixing by the PBOC yesterday, followed by an even weaker CNY fixing today at 3.3702, some 250 points above market expectations. China also raised the amount of foreign currency Chinese banks are required to hold in reserves. The none too subtle signal from the PBOC about yuan strength sent USD/Asia sharply higher overnight, led by USD/CNH, which rose 0.55% to 6.780.
After the USD/CNY fixing surprise, USD/CNH and USD/CNY has actually fallen 0.20% this morning, leading to some temporary strength in the rest of the Asia bloc. However, and I’m surprised markets tactically ignore this; disregarding guidance from any Chinese authority, let alone the PBOC, is a dangerous business. Given that US dollar strength is coming from both developments in the US itself, fading risk sentiment, and now from the PBOC, any rally in Asian currencies is probably one to sell into.
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