US dollar retreats as US yields dip

Overnight, a series of Federal Reserve Officials fanned out and drummed a familiar message, that higher inflation levels are transitory. It has become business as usual in the market, in the sense of dip-buying buy everything. US long-dated yields retreated, which sent the US dollar lower against major currencies overnight, in particular the Asian currencies.


With Wall Street deciding to have a lower inflation-risk session, risk appetite rebounded, leading to a rotation out of haven US dollars. The dollar index fell 0.20% to 89.84, edging lower again to 89.77 in Asia. Overall, the dollar index remains within its recent 89.60 to 90.30 range, with its next directional move signalled by a break of one of those levels.


The story is much the same amongst the major currencies. EUR/USD and GBP/USD have risen to 1.2225 and 1.4180, respectively in Asia, with resistance nearby at 1.2250 and 1.4245. Both pairs continue to trace higher daily lows, and it will probably take a sudden deterioration in the global recovery story to delay further rallies ahead.


Things are getting more interesting in the Asian currency space today, with USD/CNY falling to near two-year lows overnight. USD/CNY fell again to 6.4050 in Asia, before recovering to 6.4120 after rumours swept the market that state banks were on the bid at 6.4000 for the PBOC, capping yuan gains. Interestingly, the offshore (and more freely trading) USD/CNH fell as far as 6.4005 before bouncing to 6.4060. First the first time in a while, USD/CNH has diverged from USD/CNY, showing more yuan strength.


A fall through 6.4000 by the onshore yuan would be a strong signal of more strength ahead, and by default, more gains in the Asia FX space versus the US dollar in general. That will need the inflation is slain or transitory narrative to continue, no sure thing right now with plenty of whipsaw price action occurring in the market.