The dollar index closed almost unchanged at 94.00 overnight, but that hides a rather choppy session. The index plummeted to 93.75 intraday as risk sentiment rose in the markets but made up all of those losses by the end of the session. With US data and earnings supporting investor sentiment for the time being, the dollar index looks vulnerable to further weakening, provided there are no negative surprises tonight. The fact that it closed unchanged overnight suggests that its return-driven strength of t -er expectations remains intact. The dollar index could hit 93.75 lows again overnight today, but only a weekly close below 93.50 tonight suggests a deeper correction. Strong speculative longs in US dollars in futures markets should limit profits today as nervous longs expire before the weekend.
The US dollar fell in Asia, with EUR / USD and GBP / USD rising 0.10% to 1.1610 and 1.3687, respectively. EUR / USD remains in a range between 1.1550 and 1.1650, but GBP / USD has risen through resistance at 1.3680. With more aggressive comments from BoE officials, a retest of the overnight highs at 1.3730 is possible, with a week-end at that level signaling a test at 1.3800 next week. A note of caution on the US dollar’s weakness is USD / JPY, which continued to climb to a 22-month high of 113.90 today. The yield difference game is very much alive and a test of 114.50 looks likely next week. Buying GBP / JPY, AUD / JPY, and NZD / JPY is often used to reflect positive sentiment in the forex markets and should mean the USD / JPY slump will remain minor.
AUD / USD and NZD / USD rode on the waves of improved investor interest overnight. AUD / USD rose 0.50% to 0.7415, its 100-day moving average (DMA), where it stays in Asia. NZD / USD was the star of the night, rising 1.0% to 0.7035, boosted by a huge surge in the September PMI to 51.70% this morning. In Asia it has risen back to 0.7050, with 0.7100 as the next technical target. The PMI is a strong assertion that business confidence remains high in Auckland despite deepening Covid-19 issues. Of course, if global investor sentiment goes south for the weekend, both antipodes will squeeze out any overnight gains as quickly as they -peared.
In Asia, the PBOC returned to a neutral USD / CNY fix at 6.4386 today after a slightly weaker CNY fix yesterday. That seems to have done its job as USD / CNY is hovering around the 6.4370 fixed level after trading much lower in the band recently. It -pears that the PBOC’s subtle reference to excessive CNY strength was being heeded by local markets. Still, I don’t expect any slowdown as export price elasticity is likely to increase with the Chinese energy import bill.
The Korean won strengthened today after the Bank of Korea spent the week selling dollars to defend the 1200.00 level. The Bok’s Lee said a rate hike is possible in November and USD / KRW has fallen to 1181.50 as a result. USD / KRW made a notable break on the downside from support at 1190.00 yesterday and the worst for the won is likely over for now. Regional currencies are also stronger today as improved international sentiment weakens the US dollar.
The CFTC Commitment of Traders report is likely to continue to reveal a strong long US dollar position versus major currencies. Some weeding out of this one-sided open interest is likely to be necessary before the US dollar rally resumes. However, the Fed’s tightening will continue to play a major role in the fourth quarter, along with mounting uncertainty over energy markets and inflation. This will maintain the supportive environment for the strength of the US dollar through the fourth quarter.
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With more than 30 years of experience in forex trading – from spot / margin trading and NDFs to FX options and futures – Jeffrey Halley is OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis for a variety of asset classes is responsible. Previously, he worked with leading institutions such as Saxo C -ital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has -peared on a variety of global news channels including Bloomberg, , Reuters, CNBC, MSN, Sky TV, Channel News Asia, as well as leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and has an MBA from Cass Business School.