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The dollar headed for its best weekly gain in three months, lifted by growing confidence that the U.S. economic recovery will outpace global peers.
“The U.S. economy is exceptionally strong relative to other countries, causing dollar short covering,” said Tohru Sasaki, J.P. Morgan’s head of Japan market research in Tokyo, pointing to employment and manufacturing indicators as well as the pace f vaccinations.
The current bout of dollar strength could continue for “several weeks,” he said, but the picture is murkier thereafter as Europe and Asia catch up with immunizations and the Federal Reserve’s continued ultra-easy monetary policy caps a rise in long-term U.S. yields.
The greenback got support from a rise in longer-term U.S. Treasury yields, which came as traders positioned for a massive fiscal spending package.
Democrats in the U.S. Senate were poised for a marathon “vote-a-rama” session aimed at overriding Republican opposition to President Joe Biden’s $1.9 trillion COVID-19 relief proposal.
There are potentially a lot of dollar shorts to cover, particularly against the yen, where hedge funds had racked up their biggest bearish bets since 2016.
The dollar was little changed at 105.585 yen on Friday after earlier pushing as high as 105.70 for the first time since Oct. 20.
The euro was mostly flat at $1.1966, maintaining its first move below $1.20 since Dec. 1 from overnight.
Westpac strategists see Europe’s vaccine rollout accelerating by the end of this quarter, which, coupled with the Fed’s commitment to ultra-loose monetary policy, will put pressure back on the dollar.
Short-term technical outlook
From a technical perspective, this week’s breakthrough the 1.2055 horizontal support and subsequent weakness below the 1.2000 mark might have shifted the near-term bias in favour of bearish traders. Some follow-through selling below a resistance breakpoint, now turned support, near the 1.1950-40 region, will reaffirm the negative outlook and turn the pair vulnerable. The downward trajectory might then drag the pair further below the 1.1900 mark, towards testing the next major support near the 1.1860-55 region.
On the flip side, any attempted recovery might now confront immediate resistance near the 1.2000 mark. A further positive move might now be seen as a selling opportunity and remain capped near the 1.2055 support-turned-resistance. That said, some follow-through buying might prompt some near-term short-covering rally and lift the pair beyond the 1.2100 mark, towards the 1.2135-40 supply zone.
“USD/JPY has reached the 200-day ma at 105.60 and we have covered our long positions. The 55-week ma lies just above here at 106.34. The longer-term view is neutral to slightly positive, but in order to adopt a more positive stance longer term the market will need to regain the 55-week ma.”
“Dips should find initial support at 104.75, the 2nd December high ahead of 104.05 (near-term uptrend). This guards the 103.33, the 21st January low.”
24-hour view: “Our expectation for AUD to ‘edge higher to 0.7660’ was incorrect as it dropped to 0.7589 (high has been 0.7649). Despite the relatively sharp decline, downward momentum has not improved by much. That said, the risk is still on the downside but the major support at 0.7560 is likely out of reach (minor support is at 0.7580). Resistance is at 0.7620 followed by 0.7640.”
Next 1-3 weeks: “We have expected AUD to weaken since last week. In our latest narrative from Wednesday (03 Feb, spot at 0.7605), we highlighted that ‘outlook for AUD is still negative but solid support at 0.7560 may not break so soon’. Shorter-term downward momentum has improved slightly and while the focus is still at 0.7560, it may take a few more days before AUD can break this level. Overall, the current negative outlook is deemed intact as long as AUD does not move above 0.7665 (‘strong resistance’ level previously at 0.7685). Looking ahead, a break of the solid support at 0.7560 could potentially trigger a rapid decline to 0.7510.”
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