Several US Dollar Crosses Near Key Levels; Key Period Ahead

Several US dollar crosses in Asia have either breached key levels, or some perilously close to. Last week USD/KRW dropped through the psychological 1,100 level, USD/TWD traded at the lowest levels in 23 years below 28.50, USD/CNY is not far from 6.50 flirts with the significant 6.50 level.

• USD/KRW has gained almost 7% in Q4, which caused some concern the central bank could intervene to protect exporters. However, it does not seem to have had too much of an impact on exporters yet, with data last week showing largest current-account surplus since September 2017. Bank of Korea Governor said at the policy meeting in November the bank would step in to curb herd behaviour in FX, but did note that appreciation appears to be having less of an impact on export performance than in the past.
• The decline in USD/TWD last week was accelerated by the CBC after it appeared to have stopped defending the 28.50 level days after Governor Yang Chin-long told lawmakers he would provide further information about currency intervention. It is also worth noting that the central bank's exchange-rate policy states any move which puts the currency a minimum of 5% from the nominal effective exchange rate's 36-month moving average puts the TWD outside of a stable range. The moves in NEER have not been as dramatic as USD/TWD so while the central bank isn't necessarily comfortable at these levels, so further downside could be on the cards.
• The yuan has seen strength based on the perceived strength in China's economic recovery, coupled with the incoming Biden administrations more stable stance on a US-China relationship, even as tensions are likely to persist. USD/CNH will be subject to a raft of data being released from China this week. November trade figures are due today, where markets will get to see all important export figures, inflation data is due on Wednesday.
• The main narrative in most of these currency moves has been the weaker US dollar as markets assess the prospect of further US fiscal stimulus and digest positive vaccine news. While most commentators advocate a continuance in this move, there are risks it could reverse. Bond yields have picked up off lows, the prospect of increased issuance from the US next year as it recovers from the pandemic could push yields higher, which could in turn encourage flows into the US dollar. CFTC data shows heavy bearish positioning in the US dollar, apart from GBP the US dollar is short against all G10 currencies to the tune of at least one standard deviation which could result in a short squeeze should the market switch direction, which is a risk given the how far lower the greenback has moved in a relatively short space of time.