The US dollar haven premium vanishes

Dollar dips after Powell comments

Overnight markets were unusual in that US yields jumped higher, as did stocks, but the US dollar sunk by quite some distance. The dollar index tumbled 0.38% to 93.08, unwinding the previous day’s gains. Some have put it down to Powell’s post-FOMC comments that the bar to rate hikes is high, but I believe his comments saying Evergrande fallout is mostly limited to domestic China caused New York to unwind the haven premium built-in over this week. A rate hike by Norway and seemingly hawkish tones from the Bank of England may also have added headwinds, with the pound rallying, dragging the euro higher. Notably, the risk-correlated Australian and New Zealand dollars also had big rallies overnight, further supporting the risk-premia unwind thesis.

GBP/USD leapt 0.76% higher to 1.3720 after the BOE statement caused investors to bring forward rate hike expectations to early 2022. I suspect the market may have overdone the rally with GBP/USD tracing out a double top at 1.3750. If clearer heads prevail and markets decide to head into the weekend with caution, GBP/USD could reverse course. Support at the head and shoulders neckline near 1.3600 remains critical support. EUR/USD also rallied, climbing 0.43% to 1.1740 where it remains sharply unchanged in Asia. With a German election this weekend, EUR/USD is likely to run out of steam ahead of 1.1800, and failure of 1.1650 will signal a large directional downside move.

With Evergrande risk premia subsiding, the risk-centric AUD and NZD both rallied impressively overnight. AUD/USD rose 0.77% to 0.7295 and NZD/USD rose 0.95% to 0.7060 where both remain in a sideways Asian session. 0.7220 and 0.6980 remain important support levels, with failure signalling potentially 200 points of losses. The ability of the antipodeans to maintain gains rests on whether risk sentiment remains positive. Both will probably head south again on negative China or US headlines.

The PBOC, once again, announced a neutral fix for USD/CNY this morning, with the PBOC liquidity injection not flowing through to yuan weakness. That continues to be a supportive factor for Asian currencies which rallied broadly overnight. However, the rally was more due to a weaker US dollar and not change in sentiment towards the region and its vulnerability to fallout from China. As such, swing in sentiment to the downside will probably see the overnight gains unwind just as quickly.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes.

He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays.

A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others.

He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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