Inflation fears boost US dollar

The US dollar rose modestly overnight as inflation nerves sapped risk sentiment and firmed up US yields, notably in the 30-year tenor. In contrast to the panic seen in equities overnight and this morning in Asia, currency markets were orderly. The dollar index tested the downside initially before regaining those losses to finish 0.05% higher at 90.27. The index is unmoved in Asia, and if dip-buyers return to equity markets this evening in New York, the index may yet test support at 90.00.


The dollar index would have performed better had it not been for the sterling. GBP/USD rose 1.0% to 1.4115 overnight as the results of the Scottish election lessened fears that another independence referendum would occur. Covid-19 restrictions were also eased yesterday in Britain, further boosting the pound. The technical picture suggests GBP/USD will rest at 1.4250 this week, on its way to 1.4400. Only a failure of the critical pivot level at 1.4000 questions this outcome.


The other major currencies spent the session on the back foot to lesser degrees, not far changed from the Monday open. EUR/USD is trading at 1.2140 with only a loss of 1.2100, suggesting a reversal. Similarly, AUD/USD is trading at 0.7835 with support at 0.7800. NZD/USD struggled to break 0.7300 once again. It is trading at 0.7265 with a failure of 0.7250, extending the pullback to 0.7200.’


Asian currencies emerged from the overnight session relatively unscathed and supported by the PBOC today, which set the CNY fixing versus the dollar at 6.4254, its strongest level in nearly two years. With FX markets content to watch the shenanigans in equities and commodities from the sidelines, regional currencies are calm today.


Two exceptions are the Malaysian ringgit and Indian rupee. USD/MYR has risen 0.25% to 4.1150 today after the government dramatically expanded its MCO’s to stop the spread of Covid-19. The fallout has been modest all-in-all, but a rally through 4.1250 by USD/MYR could see further gains to 4.1500. Much will depend on the Covid-19 situation in Malaysia.


The Indian rupee is also in danger of running out of steam after an impressive rally driven by dip-buying foreign investors and a lack of importer US dollar buying. The Covid-19 tragedy shows no signs of ebbing, and with cities and states imposing lockdowns as the central government vacillates, an economic hit is now inevitable. That seems to have taken the wind from the sails of the INR rally. USD/INR held its 100-DMA at 73.400 overnight and is now threatening its 200-DMA at 73.637. A rise above the RBI QE breakout line, today at 73,720, will signal that INR’s decline has resumed.