US dollar retreat accelerates

Hawkish Lagarde sends dollar lower

The US dollar slumped overnight, losing ground against both the G-10 and EM space. That contrasted with a rise in US yields, but equities, bonds and currencies seem to be running their own separate races now. ​ The catalyst was a hawkish blog post by ECB head Christine Lagarde who said rate hikes were on the way in the next few months. That prompted a massive rally by EUR/USD which spread to other currencies. The dollar index slumped 0.90% to 102.09, closing below support at 102.50. That should see the dollar index test 101.00 before the reality of a hawkish Fed reasserts itself. In Asia, China concerns have seen equities fall and some short-covering come into the US dollar, pushing the index back up to 102.25.

EUR/USD leapt 1.30% higher to 1.0690 overnight after the Lagarde comments. It has eased back to 1.0665 in Asia but has nearby support now at 1.0650. Initial resistance lies at 1.0700 and then 1.0750 followed by 1.0820, the multi-decade breakout line. A weekly close above the latter is needed to suggest a medium-term low is in place. I believe sustaining rallies above 1.0700 will be challenging though. GBP/USD coat-tailed EUR/USD higher by 0.77% to 1.2585 overnight, easing to 1.2865 in Asia. It now has support at 1.2500, with resistance at 1.2600 and then 1.2650.

Higher US yields have kept USD/JPY steady at 127.60 today with initial resistance at 128.00. We would need a large rise in US yields now to offset the weight of long USD/JPY positioning in the nearer term. Failure of support at 127.00 could trigger a capitulation trade potentially targeting the 125.00 support area. Once again, at those levels though, given the trajectory of US and Japan interest rates, being short becomes a dangerous game.

AUD/USD and NZD/USD booked another night of gains, rising the sentiment wave 0.90% higher overnight. In Asia, China’s nerves have seen AUD/USD fall 0.40% to 0.7080, and NZD/USD fall by 0.50% to 0.6435. Any rally above 0.7200 or 0.6500 will be challenging though as both currencies remain at the mercy of sudden negative swings in investor sentiment, especially from China.

Asian currencies have rallied powerfully overnight, led by a 1.25% gain by the KRW, and 0.75% gains by the THB and TWD. Both USD/CNH and USD/CNY have fallen by 0.50% also overnight. Notably, the MYR and IDR had little to show for the US dollar sell-off. China nerves have already reversed some of those overnight gains by Asia FX, highlighting the low risk appetite and fragile sentiment typifying currency markets and others now. USD/KRW has risen by 0.50% to 1264.50, making the won the worst performer in Asia today.

The recovery in Asian currencies has been led by stronger CNY fixings from China but is overall, a weak US dollar story. A reassertion of risk aversion, or a jump in US yields, will have the recovery back to square one as quickly as it began. I believe Asian central banks will need to accelerate tightening to stave off medium-term weakness.

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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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