Europe COVID-19 situation keeps US dollar firm
The US dollar rally continued on Friday after Austria announced a full national lockdown due to spiralling Covid-19 cases. Fears that new virus restrictions across the Eurozone would derail its recovery saw the US dollar rise against the euro, but it was also evident that haven-related buying also boosted the greenback generally. The dollar index rose 0.57% to 96.06, edging higher to 96.11 in Asia.
The deteriorating risk sentiment weighed on the Australian and New Zealand dollars, which gave up over 0.60% to 0.7250 and 0.7000 respectively. With commodity prices also softening still, AUD/USD is likely to remain under pressure with a failure of 0.7220 opening further falls to 0.7150 initially. NZD/USD may find some support ahead of Retail Sales data and the RBNZ policy decision on Wednesday, With 0.25% priced in, if the RBNZ does not go 0.50%, NZD/USD could fall below 0.6900 this week.
USD/JPY is trading at 114.00 this morning and looks to have settled into a 113.50 to 115.00 trading range for now. Haven buying will support the yen, limiting USD/JPY gains unless long-dated US yields start moving higher across the curve again. With anti-lockdown riots sweeping Europe over the weekend, the environment for the single currency is challenging, without also pricing in a potential economic slowdown because of them. EUR/USD could test 1.1160 this week and that in turn sets up a potential retest of 1.1000. GBP/USD continues to find support due to its more impressive data of late but will remain guilty by geographic association with the euro. GBP/USD is steady at 1.3445 today and looks likely to trade in a choppy 1.3400 to 1.3500 range through the start of the week.
The US dollar strength story has been confirmed mostly to the G-10 space so far with Asian currencies remaining firm, mostly due to a constantly appreciating Chinese yuan. The PBOC set a weaker yuan fixing this morning, and noises were made from China officials over the weekend about speculation in the yuan by banks, which means buying yuan. Taken together, it seems that the PBOC may have felt yuan strength had gone far enough for now and thus regional Asian currencies are likely to struggle this week. I expect them to cautiously mark time for now unless the yuan weakens rapidly, which is unlikely, or US data does not impress this week. Any signs of a slowing in the US would be the catalyst for further Asian FX weakness, as would more Fed officials jumping on the Fed Vice-Chairman’s faster taper narrative.
Oil remains on the defensive
Oil prices tumbled on Friday thanks to fears over the European economic recovery and the ongoing threats by President Biden and other leaders to release strategic reserves onto the markets to push down prices. Brent crude tumbled 3.23% to USD 78.45 a barrel, and WTI collapsed by USD 4.05 to USD 75.65 a barrel.
In Asia, both Brent and WTI have added 25 cents to USD 78.70 and USD 75.90 a barrel on modest short-covering. Brent has resistance at USD 77.00 a barrel, with the 100-day moving average (DMA) at USD 74.00 providing support. WTI has resistance at $80.00 a barrel, with the 100-DMA at USD 76.70 the next major support.
The threat of coordinated SPR releases from various economies is more noise than substance, with President Biden unable to release a material amount from the SPR unless the situation can be legally defined as a material supply disruption. That would be a tenuous connection to make, as supplies continue to flow globally, albeit at higher prices. Europe is a rather more sobering situation, and if the Eurozone countries move back into more strict lockdowns into the holiday season, the knock-on effects on consumption will be noticeable.
Until the European situation clarifies one way or the other, oil rallies are likely to struggle for momentum above USD 82.00 and USD 80.00 respectively. Nevertheless, with oil prices now around 10% lower than a few weeks ago, and demand still robust in America and Asia, I do not anticipate another huge sell-off from here.
Fed taper torpedoes gold
Comments on Friday by the Fed Vice-Chairman suggesting that a fast Fed-taper could be in order, torpedoed gold’s rally, sending it 0.70% lower to USD 1846.00 an ounce. Once again, gold’s vulnerability to any hint of tighter US monetary policy has been highlighted, with a US dollar rally on Friday also weighing on gold prices.
That said, gold’s technical picture remains constructive in the medium-term, especially as it has spent over a week above the previously formidable zone of resistance between USD 1832.00 and USD 1825.00 an ounce. Gold’s Relative Strength Index (RSI) also hit extreme overbought levels last week, but Friday’s retreat has moved it back to neutral, another supportive technical factor.
Gold has risen to USD 1847.50 in quiet Asian trading and further losses cannot be ruled out as fast-money longs are culled. They should be limited to USD 1830.00 an ounce though, with a return to USD 1800.00 unlikely at this stage. Gold has topped out a number of times between USD 1870.00 and USD 1880.00 last week, and this denotes its next major barrier to further gains.
In the bigger picture, the repression of rates in the long-end of the US yield curve, along with US data showing that inflationary pressures are rising, finally seems to be bringing the inflation hedging trade back. With inflationary pressures reflecting only in short-dated rates, for now, only more officials jumping on to a faster-taper narrative, or a sudden move higher in longer-term US yields is likely to derail gold’s rally. Gold will likely consolidate in a USD 1830.00 to USD 1860.00 an ounce range over the first half of this week.