In contrast to the action in equity, bond and energy markets, currency markets remain in a state of suspended animation. The US dollar continues to range, the dollar index edging lower to 90.80 overnight, although the equity sell-off in Asia has pushed it higher by 0.15% to 91.07 today. A further squeeze in US bond yields this evening could see the index test resistance at 91.60.
Although markets are ranging, several currencies remain vulnerable to US dollar strength. EUR/USD has fallen to 1.2050 today, not far from support at its 100-DMA at 1.2025, and then 1.2000. Failure of the latter could extend losses to the 1.1800 regions. Although yesterday’s UK budget was well received, with the fiscal taps to be left fully open until December, the British pound could not rally. GBP/USD has fallen to 1.3935 today, the middle of its 6-month ascending wedge, bordered by a.3800 and 1.4040. Failure of 1.3800 in the days ahead opens up a material correction lower for the pound.
With their high betas to the FOMO equity rally of 2020, the Australian, Canadian and New Zealand dollars are also at risk of a significant correction lower. Although iron ore prices remain high, copper, platinum, aluminum, and tin prices have retreated in recent days, eroding the Commonwealths’ usual source of support. At 0.7770 today, AUD/USD is hovering just above its multi-month ascending wedge support at 0.7750. USD/CAD remains just shy of long-term resistance at 1.2690, and NZD/USD is just above its multi-month support at 0.7200. Weekly closes through those levels tomorrow will signal a significant correction has started.
By contrast, Asian currencies remain a sea of calm, with only the Korean won and indonesian dollar showing cracks. The PBOC raised the USD/CNY markedly to 6.4758, the largest move in some time. However, it has kept USD/CNY anchored between 6.4000/6.5000 since the start of the year, which has anchored the rest of the Asian currency grouping. If the won and rupiah are hinting at further US dollar strength ahead, it will need the PBOC to start raising the fixes above 6.5000 for the edifice to crack. The Indian rupee, Indonesian rupiah, and Philippine peso remain the most vulnerable to US dollar strength among the regional currencies.