Short squeeze propels US dollar higher
The US dollar staged an impressive rally on Friday, which looks to be a good old-fashioned short squeeze, given that US bonds and US equities did not move that much. On Friday, the dollar index rose 0.50% to 90.51, climbing another 0.06% to 90.57 in Asia. Friday’s rally sees the index near the top of its two-week range. A rise through the double top at 90.62 could see the US dollar short squeeze extend to 91.00 initially.
In the same vein, both the euro and British pound fell on Friday, as did most of the majors. The price action looks corrective, with EUR/USD at 1.2100 and GBP/USD at 1.4110 today. Both could potentially fall in the days ahead, but only the failure of 1.2000 and 1.4000 changes the bullish underlying technical picture.
Both AUD/USD and NZD/USD were sold heavily on Friday for much the same reasons. Of the two, the NZD/USD looks the more vulnerable, with a failure of 0.7100 opening another 100 points of losses. AUD/USD has firm support at 0.7650 and 0.7600.
With China away, Asian currencies have given ground versus the US dollar today in Asia with USD/IDR, USD/MYR and USD/PHP and USD/IDR all 0.20% higher. With the PBOC back in the office tomorrow, markets will watch the USD/CNY fix closely for signs that the PBOC is happy to see CNY weakness. That could lead to more Asian FX weakness as well.
Overall the US dollar rally looks like a corrective culling of short US dollar positioning ahead of this week’s highlight, the FOMC policy meeting on Wednesday. I am expecting no change to the Fed Funds rate or the language. Although US core inflation has hit 30-year highs, the Fed is too heavily invested in the transitory inflation narrative to blink now. Thus, I very much doubt the members will even move their rate hike expectations forward in the dot-plot, so the meeting could become a non-event for the US dollar.