US dollar in calm waters

As previously stated, other asset classes, ex-equities, remain far more cautious following the FOMC dot-plot-gate and Bullard in a China shop inflation comments this week. With one eye on next week’s PMIs from Asia and the US Non-Farm Payrolls, currency markets continued to trade sideways with the US dollar quietly consolidating the previous week’s gains.

It remains a range-traders market as the dollar index once again finished almost unchanged at 91.82. It has drifted a few ticks lower in moribund Asian trading. EUR/USD, USD/JPY and AUD/USD are also almost unchanged over the past 24 hours at 1.1940, 110.90 and 0.7560, respectively.

An unmoved Bank of England overnight has seen Sterling fall 0.30% to 1.3932 as of today. Notably, GBP/USD failed precisely just ahead of resistance at 1.4100 earlier this week and has now closed back below its 100-day moving average at 1.3950. That sets up GBP/USD to retest its recent lows at 1.3800 into next week, and I cannot rule out a deeper correction with a potential head and shoulder pattern forming on the pair.

USD/CNY continues to trade near the top of its range at 6.4650 today, with the PBOC setting a weaker fix today, and injecting CNY 20 billion via the repos this morning. That follows a CNY 10 billion injection yesterday. The PBOC continues to signal that comfortable with a weaker Yuan for now, which has kept the pressure on other regional currencies.

Notably, USD/Asia has not corrected lower this week to any notable degree, with THB, MYR, IDR and INR posting almost no gains at all, although the KRW and PHP have made up some lost ground. The post inflation scare bounce has been reflected in modestly stronger DM currencies and not EM currencies. That suggests that markets remain concerned about the low being in place for US rates and further US Dollar strength below the surface. I do not disagree with this premise at all, and next week’s US Non-Farm Payrolls may answer that question for us.

I expect currency markets to continue ranging into the end of the week, with a gentle bias towards US dollar strength.