US 10-year bond yield boosts greenback
The US dollar rallied sharply against the major currencies overnight as US 10-year bond yields surged back above 1.60%. The dollar index of major currencies rose sharply by 0.58% to 96.22 overnight, more than offsetting the previous day’s falls and leaving major technical support at 95.50 intact once again.
EUR/USD has fallen 0.70% to 1.1300 and has traced out a number of failures ahead of 1.1400 resistance. Failure of support at 1.1270 heralds a retest of 1.1200. GBP/USD has fallen 0.40% to 1.3470, with resistance at 1.3550, last week’s high and the 100-day moving average (DMA). Failure of support at 1.3400 signals the next leg lower. The widening US/Japan rate differential has pushed USD/JPY 40 points higher to 115.75 today, Asia’s biggest FX mover. Assuming that US yields remain elevated, there is nothing on the charts to stop a rally to 118.00 in the coming weeks.
The US dollar rally stopped the AUD, NZD and CAD rallies in their track, marking an abrupt end to their holiday season rallies. Although equities rallied on diminishing omicron fears, that same situation has allowed US yields to rise sharply, lifting the US dollar. The US dollar rally could peter out if sentiment remains strong, but the moves in equities and currencies highlight what a messy year could be ahead, without the unifying theme of the post-vaccine recovery central bank back-stop in play. In the meantime, AUD/USD has fallen to 0.7200 overnight and is in danger of retesting 0.7100. NZD/USD has fallen to 0.67800 and could revisit 0.6700 initially, and USD/CAD moving higher to 1.2800.
With USD/CNY anchored around 6.3700, and China content with monetary settings for now, including daily liquidity via the repo, Asian currencies have remained anchored as well. However, some cracks are starting to appear, with USD/KRW rising to 1194.50 today and USD/MYR jumping higher to 4.1800. If US yields continue to move higher this week, Asian FX weakness could become more widespread, with INR, PHP, and IDR the most vulnerable to widening yield differential perceptions.
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