It is probably no coincidence that the moves higher in base metals and energy, almost all of which is priced in US dollars internationally, has also been reflected in US dollar strength. The greenback also continues to gain a tailwind from the firming of long-end bond yields. Overnight, the dollar index rose another 0.50% to 90.95, leaving it squarely in the middle of its broader 90.00 to 92.00 five-week range. The dollar was bolstered after a superb Retail Sales report for January, with a gain of 5.3%, smashing the forecast of 1.1%.
The G-7 currencies and AUD, NZD and CAD all retreated modestly overnight, except the Japanese yen. Once again, USD/JPY showed its sensitivity to the US/Japan interest rate differential. A sideways day in US bonds is seeing USD/JPY retreating to 105.90 this morning. Any firming of US yields should see the USD/JPY test 107.00, having staged a multi-month upside breakout on Tuesday.
This morning, China’s return saw the USD/CNY fixed at 6.4536, almost identical to the last fix a week ago. This morning China offered CNY 200 bio vis the 1-year MLF, offsetting maturing amounts, but continued draining liquidity via the 7-day repo. That has kept the yuan firm at 6.4545 and has spared the rest of Asia any blushes from the dollar strength apparent in the developed market space. As long as China keeps the yuan firm and drains domestic liquidity, the rest of Asia orbiting on China’s event horizon should maintain some immunity from dollar strength.
The rally by the US dollar versus the developed market space has been impressive over the past few days. In general, though, the technical picture suggests this is a correction to underlying dollar weakness still. That could change, but I would prefer to wait for the dollar index to break either 90.00 or 92.00 before drawing any longer-term conclusions.
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Senior Market Analyst – Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia and the New York Times. He was born in New Zealand and holds an MBA from the Cass Business School.