US dollar’s decline resumes

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US dollar reverses course as US yields stabilise

The US dollar gave back all of its gains from Monday overnight and US yields remained unchanged. The dollar index fell 0.40% to 90.09, having touched a high of 90.60 earlier in the session. The index has dropped again in Asian trading, easing 0.16% to 89.95. Although this week has all the hallmarks of a tail-chasing range-trading one, it does highlight how important the direction of US yields is to the dollar’s direction at the moment. Yields up, dollar up, yields down, dollar down; it becomes as simple as that.

The fall in the dollar overnight saw major currencies rally strongly, with EUR/USD climbing 0.46% to 1.2205. AUD/USD rose 1.0% to 0.7770, and NZD/USD rose by 0.70% to 0.7230. However, I note that all three cyclicals remain below the rising support lines they broke down through on Monday, suggesting that the US dollar rally is not down yet.

GBP/USD rose an impressive 1.12% to 1.3660 overnight after the Bank of England Governor appeared to dismiss the prospect of negative interest rates. Sterling has risen to 1.3690 this morning, threatening resistance just above at 1.3700. With the pound marching to its own beat, a daily close above 1.3700 opens the road to 1.4000 initially. EUR/GBP fell 0.67% overnight to 0.8935, and the cross has eroded support at these levels, grinding lower to 0.8925 in Asia. Readers should monitor to cross for clues to sterling’s direction. The long-term triple-bottom support at 0.8860 is within striking distance. A daily close below this point heralds another decisive round of general sterling strength.

Asian currencies have also rallied, with the Singapore dollar notably gaining 70 points versus the greenback, as USD/SGD reversed Monday’s upside breakout and fell to 1.3230. USD/CNY continues to mark time around 6.4500, with tightening Monday supply data yesterday giving added support. The Malaysian ringgit had a volatile day yesterday, USD/MYR rising to 4.0720 before falling back to 4.0430 this morning as local equity markets regained their poise.

Asian currencies still remain off their highs versus the greenback. Notably, USD/KRW has traced higher an impressive multi-day low just ahead of 1080.00 and a dovish BoK on Friday could trigger a squeeze in short USD/KRW positions. The direction of US yields seems to have a 100% correlation to the US dollar at the moment. As such, that is what should be monitored for directional signals for the rest of the week. The US dollar short squeeze still has plenty of juice left in it over the coming weeks.

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