Dollar falls on higher risk sentiment

Ukraine talks weigh on dollar

The US dollar retreated overnight, led by USD/JPY which collapsed to 122.00. Hopes of an improvement in the Ukraine situation, after comments by Russia also lifted market sentiment, reducing the US dollar’s haven bid. Slightly lower US yields also eroded some support. The dollar index fell 0.70% to 98.40, falling again in Asia to 98.17. The index has traced out a double bottom at 98.00 overnight and has support there and at 97.75. Sustained failure of the latter will signal a deeper correction lower; however, much will depend on whether USD/JPY continues falling aggressively.

USD/JPY traded in a 200-point range overnight, breaking support at 123.00 to finish 0.83% lower at 122.90 in New York. It has continued falling in Asian trading, dropping another 0.80% to 121.95 today. Although the yen rally is being blamed on the BOJ extending its JGB bid across the curve, I am struggling to see how that is immediately bullish for the yen. A more likely reason is lower US yields overnight, and most especially, yen repatriation ahead of the financial year-end tomorrow. No doubt there are a number of fresh long USD/JPY positions put on above 124.00 that have been squeezed as well.

A new financial year on Friday could see those flows reverse, especially if US Non-Farms are strong, pushing up yields. Readers should be cautious about getting too negative USD/JPY at these levels, as the underlying drivers of yen weakness have not changed. I suspect only a plunge in oil prices or US yields would change that narrative. USD/JPY has support between 121.00 and 121.25 which looks attractive, with resistance at 123.00 initially.

EUR/USD soared 0.90% higher to 1.1085 overnight on the Russian comments about the Ukraine strategy. It has gained another 0.20% to 1.1110 this morning but heavy 1.1100 option expiries should keep it pinned near present levels until the New York cut. EUR/USD also faces triple-top resistance at 1.1135 and I remain sceptical of its ability to maintain gains around here. More seemingly, positive news from the East could extend gains over 1.1200, but a harsh dose of reality from the news wires could just as easily send it back below 1.1000.

AUD/USD and NZD/USD edged higher overnight but remain in a range, consolidating recent gains. Notably, neither picked up the Russian tailwind seen elsewhere. AUD/USD has resistance at 0.7550, while NZD/USD has resistance at 0.7000.

Asian currencies rallied sharply overnight, led by the Korean won, Thai baht and New Taiwan dollar. Once again, the difference between reduced operations and ceasefire has passed over the heads of regional markets, who it seems, are as keen as anyone else to price in hopes of a Ukraine settlement. China’s PBOC set a weaker yuan today at the USD/CNY fixing, hinting they are not interested in seeing material yuan appreciation from these levels still. That has taken the heat out of the Asia FX rally this morning although USD/THB and USD/NTD have fallen 0.40% today, while other pairs like USD/CNY and USD/SGD are 0.20% lower, suggesting Asian currencies remain bid. The longevity of the Asia FX rally is directly proportional to how long the market believes “reduced operations” is a sign of a Ukraine peace deal.

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