U.S. Dollar In Command

The US dollar rallies powerfully

Friday’s Non-Farm Payrolls data put Fed tapering back in the middle of the dinner table, sending US yields and the US dollar higher. The dollar index staged an impressive 0.57% rally, carving through resistance at 92.60 on the way to a 92.78 close. In Asia, the dollar index crept slightly higher to 92.80. Activity in Asia will be much reduced in currency markets due to national holidays in Singapore and Japan.

With a divergence in monetary policy direction seemingly inevitable over the next quarter, the euro plunged, finishing the session 0.60% lower at 1.1760, where it remained this morning. EUR/USD’s nearest resistance was distant at 1.1835, with today’s low at 1.1743 initial support. A failure of key support at 1.1700 opens up further losses to 1.1600 initially.

Sterling failed at its 100-day moving average (DMA) at 1.3865 once again on Friday, finished the day 0.40% lower at 1.3672. It has eased to 1.3565 today and while the 100-DMA caps rallies, it could extend falls to the 200-DMA at 1.3760. Sterling will likely fare better than the euro with the ECB solidly anchored in QE forever territory and the Bank of England hinting at tighter policy ahead.

A stronger US dollar generally, and a spike in US bond yields post US data on Friday, saw USD/JPY jump 0.43% to 110.22. As I have said recently, USD/JPY has dissolved into a pure yield differential play, and if US bond yields continue to climb, USD/JPY will, by default, also rise.

USD/JPY has resistance at 110.65, and failure opens further rallies to 111.50 in the days/weeks ahead. If US yields turn down, USD/JPY should fall to test the 100-DMA at 109.65. A passing of the US infrastructure bills this week should put upward pressure on US yields and, by default, USD/JPY.

On Friday, a stronger US dollar saw China set a much weaker CNY fix today at 6.4840. USD/CNY headed south to 6.4770 this morning but remained nestled in its wider 6.4500 to 6.4900 range of the past six weeks, except for two days. That has eased the selling pressure on Asian currencies this morning, although that is only likely to be temporary.

Assuming no miraculous change in regional Asia’s COVID-19 fight, and if Fed tapering now becomes increasingly expected in Q4, which I believe, the pressure on Asian regional currencies will resume in earnest, sooner rather than later. As outlined above, a divergence in the direction of US monetary policy with most of the rest of the world will pose particular challenges for Asia, leaving central banks here hamstrung on more monetary policy easing, if that becomes needed.

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