Asian currencies stage a technical rebound 

Japanese yen pares gains

The US dollar index shrugged off a plunging USD/JPY overnight, climbing an impressive 0.72% to 104.75 overnight, where it remains in Asian trading. The heavy weighting of the euro in the index explains the dollar index rally overnight, assisted by sterling easing as well. Having broken through 104.00, that becomes interim support, followed by 105.50. The longer-term picture still suggests that a larger move towards 120.00 remains on track. In the meantime, resistance at 105.00 is the index’s first target.

EUR/USD plunged by 1.26% to 1.0380 overnight as Russia announced partial natural gas sanctions on some European importers. EUR/USD is holding its own today but the weaponisation of natural gas by Russia will ensure that any corrective rallies will struggle above 1.0500. Russia risks now bringing the support at 1.0330 into sight, and any escalation on this front is likely to see EUR/USD testing parity sooner rather than later.

Soft UK data raised stagflation and recession fears overnight, sending GBP/USD 0.40% lower to 1.2200. Heavy EUR/GBP selling saved GBP/USD from a deeper move lower but is only likely to be a temporary respite. GBP/USD has well-defined resistance at 1.2400 and risks a move below 1.2100 in the near term as the economic picture darkens. It will also eventually become guilty by association with the euros natural gas travails.

USD/JPY plummeted to 127.50 overnight, eventually closing 1.30% lower at 128.30 as risk aversion by Japanese investors, and a very long USD/JPY market, prompted heavy yen buying. That appears to have already run its course, with USD/JPY jumping 0.43% to 128.85 in Asia today. Support at 127.00 was never threatened, and with nothing materially changing on the US/Japan rate differential front, the risks now shift to a resumption of the rally back towards 131.00. AUD/USD and NZD/USD remain ugly on the charts but have rallied by 0.40% today to 0.6880 and 0.6250. AUD/JPY and NZD/JPY buying will be the culprit and is likely to provide only temporary support unless global risk sentiment suddenly shifts to the positive side.

Asian currencies are staging a modest rebound today after another tough overnight session, averaging around 0.20% gains although the Korean won has jumped by 0.55%. The rebound looks corrective in nature as equities have stabilised in the last 12 hours. Given the retreat this week, today’s rally doesn’t suggest sentiment has materially changed, and with weekend risk ahead, we have probably seen the best of Asia FX gains today.

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