US dollar retreats on transitory Powell

In line with other asset classes, the US dollar finally retraced lower overnight as Fed Chairman stuck to transitory inflation narrative at prepared Congressional testimony. Given that financial markets were panicking over the end of the global reflation trade in the days before, it is impossible to guess whether the Powell comments are merely a temporary pause to the global reflation trade unwind or mark the end to the correction. We will have a clearer view by the week’s end, hopefully.

The dollar index gave back all of Friday’s gains overnight, falling 0.52% to 91.84, edging slightly higher in Asia to 91.91 on intra-day short-covering. The dollar index has traced out support and resistance at 91.80 and 92.40, respectively, and a break of either signals the dollar index’s next directional move.

The major currencies all rallied in sympathy with the lower US dollar, with EUR/USD climbing to 1.1910 and GBP/USD to 1.3920. A rise through 1.1925 or 1.3950 could extend their gains, potentially adding another 50 to 75 points. AUD/USD rallied 0.80% to 0.7540 overnight but has fallen 0.35% to 0.7525 today as iron ore prices tumbled. That leaves it mid-range between 0.7460 and 0.7550, and if China’s efforts to push iron ore prices lower continue to work, AUD/USD will struggle to hold upside gains, even if the US dollar retreat continues. USD/JPY rose to 110.35 overnight, gaining another 10 points today, as the US yield curve steepened once again. USD/JPY continues to be a mechanical US/Japan yield differential play.

Notably, USD/Asia has ignored the US dollar pullback elsewhere overnight, with USD/Asia continuing to grind higher today. The PBOC set a slightly firmer Yuan fixing at 6.4613 and left liquidity neutral, but the fix was still higher than yesterday’s 6.4546. The yuan weakness seems to have been enough to keep USD/Asia bid. Offshore USD/CNH continues to flirt with resistance at its 100-DMA at 6.4694, making regional traders wary of further US Dollar strength. Financial markets are heavily invested in long AsiaFX as a global recovery play. It seems that that heavy positioning and the PBOC pushing the CNY lower is tempering further AsiaFX rallies.

Overall, given the wild swings in sentiment seen in the past few days, we can expect more of the same as the week progresses. So be nimble or be deep-pocketed.