Risk aversion boosts US dollar
With the tone in Asian markets generally defensive today, the US dollar has rallied on risk-aversion flows, the dollar index climbing 0.35% to 90.45. Like equities, today’s rally is more likely to be about positioning, with the world heavily short the US dollar versus everything. The dollar index has resistance just above at 90.50, and a rise through that could spur more stop-loss buying of the greenback versus the major currencies. In the bigger picture, today’s US dollar rally looks corrective though, and not structural.
Asian currencies are lower across the board, with the Thai baht the region’s under-performer. USD/THB has risen 0.60% to 30.0000 after a large Covid-19 outbreak amongst migrant workers in a fish processing and industrial precinct near Bangkok. The Chinese yuan, Indonesian rupiah, Singapore dollar and Malaysian ringgit are all between 0.20% and 0.35% lower today versus the US dollar.
The commodity currency grouping has had a tough morning, USD/CAD rising 0.50% to 1.2850. AUD/USD falling 0.65% to 0.7570, and the NZD/USD falling 0.60% to 0.7095. The AUD/USD, in particular, is flirting with support at this level, with further losses possible to 0.7500, especially if the Covid-19 outbreak in Sydney deteriorates. New Zealand authorities have raised the volcano, Mount Ruapehu’s alert level to level two, which may also be weighing on the kiwi. A major eruption from the mountain where I learnt to ski, would potentially disrupt activity across the country’s most densely populated areas. Volcanos and Covid-19 aside, iron ore prices have risen 4.70% today. Copper and other industrial bases holding firm, and gas prices continue racing higher; I suspect the sell-off will be transitory.
Finally, although the euro has retreated 0.50% in the face of the general US dollar rally, the UK sterling has had a torrid morning. With no signs of a Brexit trade agreement, but plenty of negative tones from both side, GBP/USD has fallen 160 points, or 1.50%, to 1.3360 today. European countries have closed their borders to the UK also, as a more contagious Covid-19 strain emerges and the UK wilts under record virus cases and deeper lockdowns. There are not many reasons to buy sterling this morning, but a sliver of Brexit progress would see all of those losses reversed.
In the bigger picture, long-term support around 1.3100 is the critical pivot level for sterling. Unless we close, on a daily basis, below that point, being short sterling under 1.3300 ahead of the Brexit outcome is a dangerous game, no matter how grim the rolling headlines. For what it is worth, my view is that a Brexit agreement sees GBP/USD race to 1.3800 with a multi-year low in place. Equally, a Brexit trade agreement failure, along with the rest of the UK’s present challenges, will see GBP/USD fall almost immediately to 1.2500. Be brave, and stay nimble.