The US dollar retreats on dovish Powell
The US dollar rally continued to fade on Friday, the dollar index having topped out above 93.50 resistance earlier last week. With markets taking a potential taper-tantrum of the board after the Powell Jackson Hole address, the dollar index fell by 0.38% to 92.68 on Friday, edging lower to 92.64 in Asia today. The 92.50 level is looming as a key pivot level now, with a daily close below signalling further potential unwinding, potentially targeting 91.50.
The return of risk appetite has seen the euro and sterling make impressive gains, rising 0.35% and 0.45% to 1.1795 and 1.3760, respectively. EUR/USD has crept above 1.1800 to 1.1805 this morning, although I would not say it is out of the woods until it reclaims 1.1900. Similarly, GBP/USD needs to close above its 200 and 50-DMAs at 1.3800 and 1.3818.
AUD/USD and NZD/USD have quickly recovered from their central bank/Covid-19 blues as international investor risk appetite returned last week, riding on the no-taper-tantrum tailwind. AUD/USD leapt 1.05% to 0.7315, and NZD/USD rose by 0.90% to 0.7010 on Friday, where they remain approximately today. Having bottomed at 0.7100 and 0.6800 last week, those two levels are the lines in the sand from a longer-term bullish perspective.
USD/CNY remains trapped in a broader 6.4500 to 6.5000 range with the PBOC content to make the daily fixing in line with moves in the underlying basket. That has left USD/ASIA to fend for itself and the return of investor risk appetite last week led to some stellar gains by regional currencies. The Malaysian ringgit staged a massive rally despite its woeful virus situation, as a new Prime Minister, hinting at much-craved political stability, and soaring oil prices saw USD/MYR plummet from 4.2400 to 4.1660 over the past week. Having rallied so far so fast, the MYR may struggle to overcome the 100-DMA at 4.1600 in the near term, particularly if oil prices top out.
The Singapore dollar, Thai baht, Philippine peso and Indian rupee also enjoyed stellar weeks, unwinding much of the recent week’s sell-offs. USD/ASIA needs to negotiate the China PMIs for the rally to continue this week. With Singapore hitting its 80% vaccination target, I expect it to outperform ASEAN FX heading into Q4. On a darker note, USD/IDR has remained pegged around 14.370.00 after the Indonesia government and Bank of Indonesia announced a “burden-sharing” arrangement extension. That is, BI will directly buy newly issued government bonds and monetise its debt. Indonesia and the Philippines got away with this in 2020, but the jury is out if Indonesia will in 2021. Indeed, USD/IDR suggests they will not. If Friday’s Non-Farm’s is strong, leading to a stronger US dollar, the Indonesian rupiah could grab the ASEAN wooden spoon from the Malaysian ringgit and Thai baht.
With month-end flows upon us, and China PMI data and US Non-Farm Payrolls ahead this week, I would caution about becoming too attached to the dovish Powell-sell-US-dollar wagon train. When something is too easy or too good to be true, it often is. Although US dollar momentum has shifted to the downside, there is plenty of potential for ugly whipsaw price action in the week ahead.