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09 September 2020

Dollar firms, yen up as tech selloff hits forex

The dollar found support on Wednesday as a stock market slide spooked investors into selling riskier currencies, while worries about Brexit pushed the pound down to a new six-week low.

The moves have made for a nearly 2% bounce in the greenback, against a basket of currencies, from the more than two-year lows it touched earlier in the month. The safe-haven yen also climbed to a one-week high of 105.83 per dollar.

“The tech selloff has caught the market by surprise, and it is a bit jittery as to whether there are broader implications,” said Bank of Singapore currency analyst Moh Siong Sim.

In the Asia session the dollar was mostly steady, pulling back from early gains on most majors as U.S. equity futures pared losses – with Nasdaq 100 futures swinging to trade 0.6% higher in the afternoon and S&P 500 futures flat.

The risk-sensitive Antipodean currencies crept from two-week lows with the futures trade, to leave the Aussie ahead 0.2% at $0.7226 and the kiwi steady at $0.6621.

Sterling was unable to shake pressure as fears grow that Britain is preparing to undercut its Brexit divorce treaty. It dipped 0.2% to $1.2950, its lowest since the end of July.

ECB watch

An overnight slump in the oil price dragged down oil exporters’ currencies.

The Canadian dollar dropped to a three-week low though steadied in Asia ahead of a Bank of Canada policy decision due at 1400 GMT. Investors expect no changes to interest rates and will focus on the tone around the outlook.

The euro was also steady as investors await Thursday’s European Central Bank meeting with some trepidation.

The common currency has lost about 2% since posting a 28-month high above $1.20 on September 1, spurred lower by comments from ECB chief economist Philip Lane, who said the exchange rate mattered to monetary policy.

Any hint of concern at the currency’s rise, or that low inflation will require ultra-easy policy for a very long time could whack the euro lower again and boost the dollar.

“Lane appears to have succeeded in drawing a line in the sand at $1.20 at least for the time being,” said Rabobank senior FX strategist Jane Foley. “We see scope that euro/dollar could dip further towards the $1.17 level on a one-month view.”

The euro last traded at $1.1772.

USD/JPY: Sidelined below 106.00 amid risk-aversion, dollar strength

USD/JPY remains depressed below 106.00 despite the bounce from weekly lows. The market mood remains sour after AstraZeneca halted its COVID-19 vaccine trials. Broad US dollar strength cushions the downside in the spot.

The USD/JPY pair turned short-term bearish after giving up, now trading around the 106.00 level. The 4-hour chart shows that the price is stuck around converging 100 and 200 SMA, while the 20 SMA gains strength downward above the larger ones. The Momentum indicator heads firmly lower within negative levels, while the RSI hovers around 43. Still, the pair continues to trade within familiar levels. A relevant support level comes at 105.50, with bears having more chances on a break below it.

Support levels: 105.90 105.50 105.10

Resistance levels: 106.35 106.70 107.10

EUR/USD Forecast: Seems vulnerable below 1.1800 mark ahead of ECB on Thursday

Short-term technical outlook

From a technical perspective, the overnight sustained weakness below the 1.1800 mark might have confirmed a near-term bearish breakthrough a one-month-old ascending channel. That said, bears might still wait for some follow-through selling below mid-1.1700s before placing fresh bets. The pair might then accelerate the slide towards the 1.1700 round-figure mark. The latter coincides with August monthly swing lows, below which the pair seems all set to extend the ongoing corrective slide.

On the flip side, the channel support breakpoint, around the 1.1800-1.1815 region, now seems to act as immediate resistance. Any subsequent positive move is likely to confront a stiff resistance and remain capped near the 1.1850-60 horizontal zone. A sustained strength beyond might trigger a short-covering move and push the pair back above the 1.1900 mark, towards the 1.1935-40 supply zone.

Crude Oil Futures: A deeper retracement is not favored

CME Group’s advanced readings noted traders trimmed their open interest positions by around 3.2K contracts on Tuesday, partially reversing the previous build. On the other hand, volume almost doubled from the previous session, rising by nearly 742K contracts.

WTI met support near $36.00

The sharp sell-off in crude oil prices appears to have met contention in the $36.00 neighborhood so far on Tuesday. Further downside, however, looks unlikely amidst shrinking open interest and the extreme oversold condition in prices of the WTI.

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