The US dollar rose sharply overnight after the FOMC members brought forward rate hike expectations, and their language changed to a less dovish stance.
As a result, the dollar index leapt 1.0% higher to 91.40, where it remained in Asia this morning. That left the index just shy of the April/ May highs around 91.45 and its 200-day moving average (DMA) at 91.51. A daily close above the latter will signal further gains to 91.80, possibly extending to 92.50.
The overnight US dollar rally left many of the major currencies at interesting levels with the potential for more downside ahead. EUR/USD fell 1.10% as of this morning, to 1.1995, an important daily support level. The fall overnight took out the 100-DMA, and its 200-DMA was at 1.1994. Further losses signal a deeper retreat that could reach the 1.1800 regions in the first instance.
GBP/USD fell 0.70% overnight on its way to 1.3995, closing below significant support at 1.4000. That was an ominous development for sterling, and it should now target its 100-DMA at 1.3940 and risks falling to 1.3800.
Among the commodity currencies, USD/CAD rose 0.75% to 1.2275 and, after some consolidation, could target 1.2350 initially. AUD/USD and NZD/USD fell 1.0% overnight to 0.7610 and 0.7050, respectively, taking out support at 0.7650 and 0.7110.
Today’s blockbuster Australian employment data lifted AUD/USD 0.25% higher to 0.7630, while an equally impressive New Zealand GDP lifted NZD/USD 0.50% higher 0.7088. ANZ Bank is calling for rate hikes to now start in New Zealand in early 2022.
However, the recoveries still look modest in the overnight falls’ context, and both need to recapture the previous support levels to maintain upward momentum. If US dollar strength persists, the rallies will run out of steam, with AUD/USD targeting 0.7535 and possibly 0.7400, while NZD/USD will target 0.7000 and 0.6950. Support for the kiwi lies just below at 0.7035, its 200-DMA.
USD/JPY climbed 0.60% overnight to 111.70 with resistance at 111.00, followed by the 112.00 area. Its fate remains intrinsically tied to the US/Japan rate differential, with the BoJ expected to stay unchanged tomorrow and potentially extending stimulus measures.
As I mentioned earlier, the Indonesian rupiah is among the more vulnerable Asian currencies to a strong US dollar and higher US yields. The IDR weakened 0.53% to 14,330.00 today and was threatening its 200-DMA at 14,350.00. USD/IDR could rise to 14,400.00 this week, particularly with the Bank of Indonesia having no choice but to remain dovish at its policy meeting today.
Asian currencies, in general, were weaker today, with USD/Asia rising across the boards. The Korean won fell to 4.1300 today, with USD/KRW having tested 4.1400 in early trading. The Bank of Korea is unlikely to sit on the sidelines, and I fully expect some “smoothing” to occur if it rises to 4.1400 again.
The Philippine peso is another notable loser, USD/PHP rising 0.70% through its 100 and 200-DMAs to 48.40 today. Watch also for USD/INR if it breaks through 73.80, which could provoke some stop-loss buying, although I expect the Reserve Bank of India won’t let things get out of hand.
China set a weaker than consensus CNY fixing today at 6.4298 while leaving liquidity neutral at the repo. The PBOC has been subtly hinting that it had seen enough CNY appreciation of late. If it uses US dollar strength to engineer some extra CNY weakness, that is likely to limit the recovery potential of other Asian currencies.
Overall, the moves in currency markets overnight look ominous unless you are bullish on US dollars. However, we need to see today’s reaction from Europe and the US to confirm whether we are witnessing a medium-term shift in the US dollar outlook post-FOMC. 2020/2021 has been notable for its many false dawns, and I would not yet discount that possibility.