The US Dollar falls on Friday

The US dollar dipped initially in Asia today, notably against the commodity currencies, but has since regained most of those losses. It diverged from the bond market on Friday, with the dollar index falling 0.25% to 90.36, suggesting that the currency market regards a steepening US yield curve as a healthy development. In the bigger picture, the US short-squeeze appears to have run its course for now, as evidenced by its divergence from US yield rises last week. However, I will await a breakout of the dollar indexes 90.00/91.00 recent range for more directional clues.

The New Zealand dollar has shrugged off Covid-19 fears today, rising 0.20% to 0.7310 after S&P raised its sovereign rating to AA+ from AA. That should support the kiwi going forward, as the AA+ rating moves New Zealand into a very small club, meaning the RBNZ will be competing with a new group of international investors as it looks to keep buying government bonds. NZD/USD broke out of its symmetrical triangle in early February and maintains an initial target of 0.7400.

The PBOC set the Yuan fixing at 6.4600 this morning, with the central bank seemingly content to keep USD/CNY between 6.4000 and 6.5000. Along with liquidity withdrawals via the repo market, yuan strength should continue, particularly if the US dollar downtrend is proven to have resumed elsewhere. Asian regional currencies have strengthened slightly versus the greenback in line with the yuan. With most of the region running dirty pegs to the dollar, any weakness is unlikely to occur unless the yuan weakens first.

Later in the week, US Personal Consumption Expenditure data is likely to show a large jump given the Retail Sales outperformance last week. US second read GDP is also likely to impress, a trend that will accelerate as the US starts to reopen. It will be the Powell testimony though that will have the most weighting for markets.