Currency markets are noisy but directionless

Currency markets had a noisy and choppy session overnight but had returned to the mean by the sessions close, with the dollar index falling just 0.12% to 90.16. That has abruptly reversed in Asia, with equity markets are pressure as US CPI nerves increase, the dollar index has jumped 0.20% to 90.30. I expect the intra-day volatility to continue, but for the dollar index to range between 90.00 and 90.50 in the days ahead, unless US CPI surprises.

Major currencies have retreated in Asia, but not materially so. EUR/USD has fallen to 1.2125, just ahead of support at 1.2120. GBP/USD has fallen to 1.4120 but remains bullish in sips as long as support at 1.4100 holds. USD/JPY is trading at 108.85 but is still locked in a 108.50 to 109.50 range, with a breakout, either way, signalling the next directional move.

The risk-sensitive Australian and New Zealand dollars have tumbled by 0.60% in Asia, as markets’ moods darken, and equities remain under pressure. AUD/USD has fallen to 0.7800 post-budget, having tested and failed at 0.7900 resistance this week. It could extend losses to 0.7700. NZD/USD failed ahead of 0.7300 and has fallen to 0.7230 today, with an extension lower to 0.7130 now possible.

USD/CNY has rebounded overnight to 6.4400 today, but regional Asian currencies are under more severe pressure as equity market losses mount. USD/KRW and USD/MYR have risen 0.40%, while USD/THB, USD/SGD have risen 0.20%, with USD/CNH climbing 0.15%. As I have stated before, with mostly dirty US dollar pegs across the region, Asian currencies are acutely sensitive to higher US interest rates and a stronger US dollar as a result. I expect regional currencies to remain under pressure until the US CPI tells us if those inflation fears are real.

That theme also encapsulates the G-10 space, with the risk barometer AUD and NZD currencies particularly vulnerable. A low US CPI print will alleviate inflation/risk/dollar pressures, but we can expect a potentially vigorous opposite move if it does not.