US dollar heads higher

The US dollar short squeeze resumes

The US short squeeze resumed in earnest on Friday, with the dollar index rising 0.54% to 90.73, leaving the index just shy of one-month highs. Despite US yields easing, the dollar firmed as investor’s nerves arose about the Trump administration’s last days, as well as the amount of new spending the new administration will be pencilling in.

With markets having spent most of 2020 selling US dollars against everything, it probably won’t take a lot of news to see some of that speculative positioning unwind. The dollar index is just shy of resistance at 91.00, the 21st December high, and its 50-day moving average (DMA). A daily close above 91.00 suggests further gains that could extend above 92.00 in the coming weeks. A firming of US yields after Wednesday’s inauguration should give the firmer dollar trade more extra momentum.

In the G-10 space, the euro, Swiss franc and Australian dollars have all traced out technical highs, and look set for more losses as the week progresses. Sterling has not yet recorded a technical reversal but has traced out a formidable quadruple top at 1.3700. Sterling fell 0.80% to 1.3580 on Friday and has eased to 1.3560 in Asia. Failure of 1.3450 signals a much deeper downward correction, possibly extending to 1.3200, its 100-DMA.

USD/JPY is bucking the trend, with JGB yields firming on speculation in Japan that the Bank of Japan will adjust their yield curve control programme this week. I find the likelihood of this remote, and if the BOJ does nothing on Thursday, USD/JPY’s rally could resume. USD/JPY’s critical level is 104.50, a multi-month descending resistance line. A daily close above 104.50 signals a move to 106.00 initially.

In Asia, USD/CNY has risen to 6.4900 this morning with the offshore USD/CNH reaching 6.5000. A rally by USD/CNY through 6.5000 likely signals further losses to 6.5500 in the week ahead. Overall, Asian regional currencies have eased this morning against the US dollar. In general, Asian currencies remain in longer-term uptrends. However, I suspect a further retreat over the next couple of weeks is likely. US yields are likely to rise after the inauguration, when the Democrat spending plans become more transparent.

The US dollar appears to be strengthening on risk aversion ahead of Wednesday’s presidential inauguration. Post that event, US yields are likely to rise once again. That, I believe, will be the catalyst for the US dollar short squeeze to extend into early February.

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