The US Dollar Index traded sharply higher against all of the major currencies on Tuesday, with the latest gains taking the greenback to fresh one-year highs against the Japanese Yen and four-month highs against the euro. Currencies are once again taking their cue from Treasury yields, which rose above 1.7% on a 10-year basis to its highest level since January.
With the momentum in stocks waning and investors hungry for any type of yield, rising U.S. rates are drawing everyone’s attention. There’s also the growth and liquidation story – the U.S. is racing ahead with vaccinations and the prospect of a strong second-quarter to second-half recovery is creating significant demand for the greenback. U.S. President Joe Biden will outline his infrastructure spending plan tomorrow and Democrats are pushing for the inclusion of more stimulus. All of which feeds into the growth story. The liquidation in stocks caused by the Archegos blowup and the unwinding of risky bets is also creating demand for the currency. Unless non-farm payrolls disappoint in a big way, which is not very likely, the greenback is poised for more gains. The February 2020 high of 112.22 is the main resistance level for USD/JPY and for EUR/USD, everyone is eyeing the November 2020 low of 1.16.
Month- and quarter-end flows pose only a short-term risk for the greenback. With U.S. stocks hitting record highs in March and the Dollar Index rising to four-month highs, asset managers will need to sell U.S. dollars to rebalance their portfolios. March 31 is also fiscal year-end in Japan, which means we could see profit-taking by Japanese investors. We saw big intraday moves in USD/JPY on March 31, 2020, with investors selling after gains in the first quarter, but typically most position adjustments are in the week and not on the day of fiscal year end. These flows tend to be short-lived.
The euro and the Australian dollar were hit the hardest by the U.S. dollar’s rise. Although Eurozone sentiment indicators increased and prices in Germany grew at a faster pace year over year, it is difficult for the euro to attract buyers with lockdowns and slow vaccine rollout. German labor market numbers are due for release tomorrow, along with Eurozone CPI. Even though both figures are expected to be better, any lift for EUR/USD will be shallow.
The Australian dollar was hit by the government’s decision to end the JobKeeper program, which provided wage subsidies for nearly a million workers. While many economists argue there are better ways to provide stimulus, investors fear that it will be a big sting for the economy and slow growth significantly. The Australian dollar should weaken further, especially if tonight’s Chinese PMIs surprise to the downside. Lower oil prices drove USD/CAD to its strongest level in nearly three weeks. Canadian GDP numbers are due for release tomorrow. With a pickup in retail sales and trade, the data should surprise to the upside.