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US dollar retreat continues

The US dollar continued to beat a modest retreat overnight, weakening across the board versus G-10 and Asian currencies. The dollar index fell 0.38% to 90.00 and has fallen by 0.25% this morning to 89.76. Today’s fall has left the dollar index testing support at 89.75. A daily close below 89.75 tonight signals that further losses to 89.00 are on the cards next week.

EUR/USD is testing multi-month highs today, rising to 1.2285 this morning. A daily close at these levels signals further gains to 1.2400 next week. The New Zealand dollar has risen over 1.0% in the past 24 hours to 0.7170 this morning, with the cyclical Australian and Canadian dollars also rising to 0.7645 and 1.2800 respectively. Both the AUD/USD and NZD/USD are testing monthly resistances, and the strong year-end finish suggests forex markets are preparing to send commodity currencies higher into the new year.

The same pattern is repeating across Asia, with the Chinese yuan, Singapore dollar, Malaysian ringgit, Indonesian rupiah and Philippine peso all at or very near 2020 highs. Although its Covid-19 outbreak is increasing at an alarming rate and limiting further gains, the Thai baht remains well supported.

It is clear that currency markets are pricing in a potentially powerful move lower by the US dollar as soon as the new trading year begins next week. I agree with the overall view but not that the unidirectional move in the US dollar lower this week, suggests that positioning is heavily one-way. Markets face a heavy data week next week, and a significant risk event in the shape of the Georgia Senate runoff elections. That could lead to some two-way volatility, especially with currency markets so obviously short US dollars. The US dollar will resolve lower in 2021, but bitter experience tells me that throwing the kitchen sink at that view at the start of the trading year, rarely pays immediate dividends.