US dollar trading in tight range

Currency markets traded sideways overnight, with the US dollar remaining in tight ranges versus both developed and emerging currencies. The fall in US 10-year yields only really impacted USD/JPY, which has long been a pure rate differential play. Unsurprisingly, USD/JPY fell 0.37% to 109.35 overnight, edging lower to 109.20 this morning. It is now approaching support at 109.10, with this region having provided support since early May. Another leg down in US yields tonight should see USD/JPY breakthrough 109.00 on its way to 108.50 and potentially 107.00.

Otherwise, the dollar index was almost unchanged at 92.06. The dollar index remains mid-point between its breakout lower at 92.60 and structural support at 91.50, also home to its 100-day moving average. A break of either 91.50 or 92.60 will signal the dollar’s next directional move.

EUR/USD and GBP/USD remained steady at 1.1880 and 1.3895, as did the rest of the majors. USD/CNY remains anchored at 6.4650 with the Indian Rupee, Indonesian Rupiah, Malaysian Ringgit and Thai Baht enjoying a night of relative calm. The most significant currencies likely to show any volatility in the next 24 hours are the Australian and New Zealand Dollars. The RBA policy meeting was somewhat hawkish, as the central bank revised its economic forecasts upwards. RBA Governor Philip Lowe sounded positive about Covid, despite the current lockdowns, saying that “the experience to date has been that once virus outbreaks are contained, the economy bounces back quickly.”

On Wednesday, New Zealand releases key employment data, and robust numbers could potentially spur a 100 point rally to 0.7100 for the kiwi.  The RBNZ is widely expected to hike interest rates at its August meeting, and strong job numbers will further solidify a hike.

For now, currency markets look for all the world to have entered an extended wait-and-see mode ahead of Friday’s US Non-Farm Payroll data. Only a spike in Covid-19 cases in China this week is likely to lift that lethargy, which should favour the US dollar.