US dollar extends gains
In contrast with the exuberance of equity markets, the US dollar rally accelerated overnight, with dollar index gains led by weakness in the euro and sterling. The dollar index ignored the softer monthly core-inflation print, rallying an impressive 0.34% to 100.33, where it remains in Asia. A test of 100.50 and then 101.00 seems imminent and the dollar index remains in a technical uptrend as long as support at 99.35 holds.
EUR/USD slumped 0.50% to 1.0827 overnight, as negative comments around Ukraine by President Putin, and an impending ECB policy meeting tomorrow, weighed on the single currency. EUR/USD remains uncomfortably near to the multi-year support line at 1.0800. Failure signals more losses to 1.0600 and 1.0300 initially, and possibly back to parity. Resistance is at 1.0950 and 1.1200, with longer-term resistance at 1.1300. Rising oil prices, Ukraine risks and/or an ECB moving to a hawkish stance all threaten more downside pressure.
Sterling tested support at 1.3000 once again overnight but this time, only managed to close on support at 1.3000. Positive UK data may give sterling a temporary respite, but a daily close under 1.3000 signals another round of losses targeting 1.2850 and 1.2700.
With US yields edging lower overnight, USD/JPY remained steady at 125.40 before resuming its climb in Asia today, rising to 125.65. USD/JPY is just below its multi-year highs at 125.80 and despite some more official noise from Tokyo today, looks poised to break through it this week. That will set the scene for a test of the May 2002 highs at 128.90. Any drop to 124.00 and 123.50 should find plenty of keen dip buyers. Only a sharp fall in US yields changes the bullish outlook.
Asian currencies held steady overnight, and have rallied with equity markets this morning, continuing a pattern of choppy short-term range trading. A gentle move lower by US yields overnight proved slightly supportive. USD/KRW, USD/PHP, USD/INR, and USD/TWD are down around 0.20% today. Weak China imports will temper any gains with onshore USD/CNY, and offshore USD/CNH holding steady at 6.3660 and 6.3750. Interestingly, both USD/CNY and USD/CNH are approaching one-year trendline resistance levels, today at 6.3775 and 6.3960 respectively. Daily closes above would signal another leg of yuan weakness.
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