US dollar moves higher as markets await FOMC
Although not many are predicting a Fed taper tantrum, currency markets appear to be waking up to the possibility. The US dollar continued its rally on Friday and what is notable is that now also includes fellow havens such as the Swiss franc and Japanese yen. The dollar index soared 0.41% to 93.25 as US yields firmed, climbing once again in Asia by 0.10% to 93.35. The dollar index is now within sight of its August high at 93.72, and only a fall through 92.80 changes the technical bullish outlook. It will probably take huge bidding interest at the US long-dated bond auctions this week to slow the upward momentum.
Firming US yields sent EUR/USD 0.40% lower to 1.1725, before easing further to 1.1710 in Asia. A failure of 1.1600 will signal a new down leg for EUR/USD that could extend to 1.1200. GBP/USD has fallen 0.30% to 1.3710 today and failure of 1.3680 targets 1.3600. GBP/USD has traced out a major top around 1.3900. USD/JPY has climbed nearly 90 points over the past two sessions to 109.90 today, as a US/Japan yield differential play at the moment, it remains stick in a broader 109.00 to 111.00 range with a bias now to the topside.
USD/CHF is also on the move, climbing above 0.9300 on Friday on its way to 0.9325 in Asia, breaking out of its three-month range. Given its haven status, the fact that the US dollar has managed to rally so powerfully in the past two sessions (approximately 130 points), is to me, a firm signal that more US dollar strength generally is imminent. An FOMC signalling a year-end ostensibly dovish taper, or a more aggressive dot plot hinting at 2022 rate hikes, should do the trick.
AUD/USD and NZD/USD are on the back foot today, falling 0.50% and 0.25% respectively to 0.7235 and 0.7020. The slump in commodity prices and risk sentiment in a liquidity thinned day in Asia is to blame and both have potentially another 100+ points lower in them over the next few sessions. Watch NZD/USD for news on the delta variant front, which escaped Auckland this weekend. Any signs that the government is going to pull the national lockdown trigger will be a major negative for the New Zealand dollar.
With mainland China closed, all eyes have been on the offshore USD/CNH this morning. It spiked to 4.4850 at the open but quickly retreated to 6.4810 later to be just 0.16% higher today. The PBOC added CNY 90 billion of liquidity via the repos on Saturday, a surprise moves to calm nerves ahead of the holidays. Its impact has been negligible on equities but seems to have soothed nerves in currency markets. USD/Asia as a result is only around 0.25% higher today. However, given the nerves over Evergrande in China and its potential fallout, and increasing taper nerves ahead of the FOMC, regional Asian currencies are likely to endure a tough week unless the FOMC is ultra-dovish come Thursday. Holiday-driven liquidity will exacerbate headline-driven moves.