Currency markets drift
A gentle rise in US bond yields was enough to sustain early US dollar gains, with robust US data raising economic expansion expectations. The dollar index finished almost unchanged at 91.17, having tested 91.30 earlier in the session. However, it remains above previous resistance at 91.00 for the third day in a row, suggesting that US strength has not yet run its course.
The inflation data overnight in Europe was enough to push the euro lower though, and it looks the most vulnerable of the major currencies to further dollar strength. EUR/USD fell slightly to 1.2035, easing to 1.2025 in Asia. EUR/USD has now spent two full sessions below critical support at 1.2055, and a fall through 1.2000 should spark more stop-loss selling. In the bigger picture, EUR/USD has the potential to fall as far as 1.1600 if dollar strength persists.
USD/JPY could yet surprise as well, consolidating around 105.00 for the past few sessions, after breaking out of its long-term down channel at 104.25 last week. It targets its 200-day moving average (DMA) at 105.60 initially, but could potentially move as high as 107.00 is short dollar positioning globally, is squeezed.
Among the commodity currencies, NZD/USD is poised to break out of the top of its symmetrical triangle. This week’s robust economic data has the market calling the bottom of interest rates, and talk is now turning to when the RBNZ will tighten. It is likely to be the first DM central bank to do so. NZD/USD is at 0.7200 today, just below the triangle at 0.7220 which it tested overnight. A breakout targets a rally to the 0.7500 region.
Asian currencies remain immune to any sort of moves, up or down this week. The main reason for that is because the PBOC has kept USD/CNY rock steady around 6.4600 this week. The PBOC appears intent on confining USD/CNY to a 6.4000/6.5000 ahead of the Lunar New Year holidays. Given that China, and almost all of Asia, runs some sort of dirty peg to the US dollar, unless USD/CNY moves, the rest of Asia is unlikely to either.