US dollar sell-off continues

The stampede out of US dollars continued Friday and into today, as investors moved out of defensive positioning and into pro-cyclical postures. With a Biden presidency expected to be more in favour of global trade, and more Federal Reserve easing inevitable, the US dollar index fell 0.32% on Friday and has reduced another 0.07% to 92.17 this morning.

The dollar index is now within shouting distance of its September lows at 91.75, with a failure greenlighting more US dollar selling. It is a measure of just how much capital was sitting on the side-lines waiting to deploy, that the dollar index has fallen from a high of 94.30 a mere three trading sessions ago. Notably, it has failed twice ahead of its 100-day moving average (DMA) over the past week.

Nowhere have those gains been more evident than with USD/JPY, which has fallen to 103.40 today, having traded as high as 105.40 last week. USD/JPY should initially target the 102.00 regions this week, but the concerns within the Japanese government are already there, with Japans recovery reliant on its export sector. Officials in Japan have already started “watching FX with urgency” rhetoric. There is little to no chance of the Ministry of Finance intervening at this stage but expect the “noise” to ramp up from the MoF as USD/JPY heads lower. The 100.00 level is likely to be their unilateral line in the sand.

The previously unloved Indonesian rupiah has been Asia’s standout performer, having rallied some 3.30% in the past week from 14,600 to USD14,120 this morning versus the dollar. The return of confidence in markets elsewhere from a pre-election deep freeze appears to have unlocked Indonesia as a value-trade. I also suspect the ever-active Bank of Indonesia to have helped the process along by selling USD/IDR.

In contrast, the Korean won has hit 18-month highs today versus the greenback, USD/KRW breaking support at 1120.00 on its way to 1114.40. The Bank of Korea is unlikely to be happy with this development, and we can expect the BoK to be intervening to slow the pace of won appreciation sooner rather than later.

The Chinese yuan is also at near-18-month highs today, USD/CNY falling to 6.5760 today, boosted by the balance of trade data and a Biden presidency expected to be more China benign. The PBOC has signalled its comfort with a stronger currency, and offshore flows continue from international investors piling into onshore government bond markets with their juicy yields. I expect yuan strength to continue, with the PBOC possibly tinkering with some capital account rules to balance out the inflows, slowing appreciation.

The weaker dollar story is the real story and not individual outperformance of any one country or bloc. Asian currencies and their antipodean neighbours will continue to appreciate, as the pro-cyclical growth trade is released from captivity. Central bank interest in Asia, Indonesia excepted, is likely to be limited to smoothing appreciation, to make sure their currencies remain running in the pack, and not ahead of it.