Inflation boosts US dollar
The US inflation data spurred a sharp rise in US yields across the curve, a selloff by equities, and in turn, a haven-derived rush into US dollar. The dollar index tore through resistance at 104.00 on its way to a 0.85% gain to 104.18 on Friday, rising another 0.26% to 104.46 in Asia. The index looks to have formed a medium-term low now as the reality of monetary policy divergence permeates the financial world. The dollar index will now have 105.00 in its sights with support at 104.00 and 103.00.
EUR/USD slumped on Friday, carving through support at 1.0600, almost reaching my 1.0500 targets for this week. It finished 0.93% lower at 1.0520 and has fallen another 0.30% to 1.0490 in Asia. With the ECB only likely to hike a total of 0.50% by September, with the Fed likely to have booked 1.50% of hikes by then, it is no surprise that the single currency has resumed its selloff. The fact that EUR/USD never seriously attempted to regain its multi-decade breakout around 1.0800 suggests that a medium-term high is now in place. Weekend developments in Ukraine were not good news either, and that is likely to further sap sentiment. EUR/USD has resistance at 1.0610 initially, with support at 1.0460.
Sterling fell by 1.43% to 1.2320 on Friday on widening yield expectations from the BOE and the Fed. In Asia, GBP/USD has fallen another 0.23% to 1.2290. Resistance is distant at 1.2425, while a retest of the May lows around 1.2150 has become a distinct possibility.
Quite surprisingly, given the move in US yields on Friday, USD/JPY was almost unchanged at 134.40, before rising 50 points to 134.90 in Asia today. I suspect the broad selloff across asset markets on Friday provoked quite a lot of haven-derived yen repatriation by Japanese investors, capping USD/JPY’s gains. That has ebbed today, allowing the USD/JPY rally to resume. A daily close above 135.00 suggests more gains to 138.00 in the week ahead, while only a fall below 133.00 changes the bullish picture. Some nerves around Friday’s BOJ policy meeting may also be tempering USD/JPY gains.
The Australian and New Zealand dollars held up relatively well on Friday, falling 0.74% to 0.7040, and 0.45% to 0.6355 respectively. An Australian holiday and severe weather in New Zealand are probably muting volumes in both today, sparing further blushes, but I do not rule out a catchup selloff in London this afternoon. AUD/USD has fallen 0.25% to 0.7025 today, with support at 0.7000 and 0.6950, with resistance at 0.7050. NZD/USD has fallen by 0.20% to 0.6340, with support/resistance at 0.6300 and 0.6450.
USD/Asia has risen sharply today after a mixed performance by Asian currencies on Friday night. USD/CNH rose 0.50% on Friday to 6.7350, climbing 0.30% to 7.6550 today, with onshore USD/CNY has risen by 0.30% today to 7.7370. USD/KRW rallied sharply by 1.23% to 1279.30 on Friday, gaining another 0.60% to 1286.70 this morning. The rest of USD/Asia is higher by between 0.15% to 0.30% this morning and it seems probable that regional central banks are doing a bit of smoothing today. Lower oil prices are modestly supportive, as was a neutral USD/CNY fixing today. However, USD/KRW looks on track to retest 1292.00 and USD/MYR, which gained no benefit from a weaker US dollar last week, could potentially reach 4.4500 this week. Higher Fed-rate-hike expectations will keep the pressure on Asian currencies this week and renewed lockdowns in China will make the situation darker still.
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