Currency markets take a breather

Currency markets moved back to the side-lines in the G-10 space overnight with a fall in US yields as investors parked money in treasuries, offsetting a risk in risk-aversion sentiment globally, which left the US Dollar marooned between the two. The dollar index finished almost unchanged at 93.22 where it remains in Asia today. If the rally in commodities and stocks continues, the US Dollar may give back some of its recent gains. Currency markets look like they are now moving into FOMC wait-and-see mode.

Despite probing the downsides early, EUR/USD. GBP/USD, AUD/USD and NZD/USD are not far away from their New York closing levels, which themselves were barely changed from Friday.  AUD/USD getting a slight 20 point boost from the commodity rally today. The Canadian Dollar has reacted positively to the projected Liberal Party election win, rallying by 0.45% with USD/CAD falling to 1.2770. Until commodity prices show signs that the worst of the selloff is over, USD/CAD is probably a buy-on-dips to 1.2700.

Offshore Chinese Yuan sunk only slightly overnight on the Evergrande saga, with USD/CNH hovering around 6.4760 today with Mainland markets closed yesterday and today. The USD/CNH rally on Friday though has lifted the cross closer to a 6-month resistance line, today at 6.4950. A close above that line signals a move to near 6.6000 initially. That will probably not unfold though until Mainland markets return and if we get concrete tapering guidance from this week’s FOMC meeting. That is likely to lead to a G-10 FX sell-off and feed through to weaker CNY fixings. Tomorrows Loan Prime Rate decisions from China could also be bearish for the offshore Yuan if a surprise cut is announced. That is not my base case though.

The rest of USD/Asia is broadly unchanged from yesterday after the US Dollar had a subdued day versus G-10 FX. Asia’s traders will be content to wait for China’s return tomorrow for further directional signals and the FOMC, despite the Evergrande noise, remains currency markets primary concern.

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