US dollar in calm waters
There was not much action on currency markets overnight, with DM and EM currencies ranging with a few exceptions. Overall, it appears that currency markets had already absorbed the fast quantitative tightening comments from Lael Brainard, with the FOMC Minutes not adding to the narrative. US yields were steady overnight as well. The dollar index crept 0.14% higher to 99.62, easing slightly to 99.55 in Asia.
The dollar index has now moved through resistance at 99.50 and should extend its rally to the 100.50/101.00 region after some consolidation. With interest rate differentials widening, and the situation darkening in Eastern Europe, dips should be well supported now.
EUR/USD was almost unchanged at 1.0900 overnight, rising slightly in Asia to 1.0910. Long-term support at 1.0800 remains the most important level to monitor. A sustained break would target 1.0600 and 1.0300 initially. Resistance is now at 1.1200, with longer-term resistance at 1.1320.
With little movement in US yields overnight, USD/JPY was almost unchanged at 123.70, where it remains today. The late March highs at 125.10 are now in sight again, followed by 125.80. USD/JPY should find plenty of support into 122.50.
The AUD, NZD and CAD all fell overnight, providing some volatility in one corner of the market. The fall was led by AUD/USD which retreated 0.90% to 0.7510 overnight. NZD and CAD both fell around 0.40%. Today in Asia, the sell-off continues led once again by AUD/USD, down 0.45% to 0.7475, with NZD/USD down 0.35% to 0.6895. The demise seems to be a combination of factors, a rapid reassessment of Fed hiking risks with quite a lot of hiking already baked into the Commonwealth’s curves. Oil’s overnight falls won’t be helping. Failure of 0.7550 by AUD/USD on a closing basis sets up a deeper reversal by all three, likely catching a number of traders out, including the author.
Asian currencies have been surprisingly resilient overnight, edging only slightly lower. Even after the Brainard comments, Asian FX remained fairly steadfast with no signs of even an incipient taper tantrum. The high level of Asian foreign currency reserves, still relatively benign inflation and the PBOC only weakening the yuan slightly have kept Asian FX steady.
One exception was the Indian rupee, USD/INR rose 0.65% to 75.777 overnight. I am putting that down to US warnings to India overnight not to get too cosy with Russia. India is in a challenging position, being also a member of the QUAD security grouping, containing the United States. Trying to argue that Russia and China are totally separate security issues will be a leaky argument to make and India faces some geopolitical risks now if it wants US support on China while being the buyer of last resort for Russian oil.
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