The US dollar resumes its slow move lower

With equity markets returning to FOMO v-shaped recovery mode, the green light was given for the US dollar sell-off to resume, after pausing on Tuesday. Price action was orderly though, with the US index falling just 0.40% to 96.50. The US sold 10-year notes at a record low yield overnight, which also helped the dollar retreat along nicely.

The EUR/USD regained 1.1300 on its way to 1.1330 overnight. GBP/USD rallied after new UK fiscal stimulus measures were well received, climbing to 1.2610. The trade-centric Australian and New Zealand dollars also recorded 0.50% gains, rising to 0.6970 and 0.6570 respectively. Regional Asian currencies made moderate gains overnight, although they are mostly unchanged this morning.

The onshore and offshore versions of the Chinese yuan continue to hold investors’ attention, though. The onshore CNY had another strong fixing today at 7.0085, versus 7.0207 yesterday. That has sent both USD/CNY and USD/CNH through the psychologically import 7.0000 versus the US dollar this morning. Equity inflows are currency supportive, with China seemingly intent on reassuring offshore investors, that FX risks associated with investing in mainland stocks are minimal for now. It also rather elegantly serves to take the pressure of current account outflows.

Both yuans look likely to continue strengthening in this context. Initial targets being 6.9500. Only a sudden flight to US dollars ex-China will muddy the picture. With markets putting Tuesday’s correction quickly behind it, that seems unlikely for now. The scope of any US retaliation for China’s Hong Kong security law being the primary risk point.

This morning’s data releases in Asia have posted contrasting pictures. We finally got a decent data print from Japan, the regions laggard. Machinery orders rose by a much improved 1.70% MoM, although they fell 16.30% YoY. Still, this is the first win in quite some time for Japan. Australian Home Loans in May fell by a much higher than expected 11.60%. That reflects the lingering hangover to activity from the nationwide lockdowns in the lucky country, with consumers preferring a wait and see approach to the economic recovery. The data going forward will be impacted by the renewed lockdown in Melbourne, with Victoria State self-isolating to control their stubborn Covid-19 situation.

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