Dollar Rebounds Ahead of Nancy Pelosi’s Taiwan Visit

Dollar Rebounds Ahead of Nancy Pelosi’s Taiwan Visit

From a softish position, the United States (US) dollar trades stronger against its major trading partners early Tuesday, apart from a further decline against the yen.

The dollar has been sinking amidst weak economic performance in the United States but fresh US-China tensions could trigger a rebound, ING Economics said in a note on Tuesday.

Today, the market expects a series of appearances by Federal Reserve officials as markets look for clues about the Fed’s plans after a second straight 75 basis point rate increase last week.

Currencies traders believe that Nancy Pelosi’s planned visit to Taiwan may renew US-China tensions, and in FX this could translate into a re-strengthening of the safe haven dollar and weakness in both CNY and China-sensitive currencies like AUD and NZD. 

AUD, in particular, is facing soft momentum as the RBA signalled inflation is near its peak. EUR/USD may retract to 1.0200

Also, markets and analysts are on alert for signs of a further economic slowdown after a second consecutive quarterly contraction in gross domestic product was reported last week, with the main focus this week on Friday’s July employment report.

Some market analysts are expecting that the Federal Open Market Committee will need to slow its pace of tightening and perhaps consider easing next year in the face of a recession.

The dollar’s softish momentum extended into this week, as the narrative of a Fed pivot appears to be cementing among market participants, ultimately triggering another round of dollar long-squeeze.

“We still warn against the sustainability of such a dollar downtrend, as further scope for a dovish re-pricing by the Fed appears limited in our view and global economic/geopolitical uncertainty should still fuel some safe-haven bets on the dollar”, ING Economic said in the note.

Yesterday’s news that US House Speaker Nancy Pelosi is planning to visit Taiwan this week – she’s reportedly due to land tonight – has prompted a reaction by Chinese authorities who threatened unspecified military action. Analysts said should this mark a material deterioration in US-China relationships, expect some shockwaves to be felt across the FX market.

The dollar, the yen – which may break below 130.00 already today-  and CHF should be the main beneficiaries, while CNY and China-sensitive currencies (along with high-beta currencies in general) could come under pressure. AUD and NZD appear mostly vulnerable in G10, according to the report.

“It is hard to predict how this new geopolitical thread will develop, and for now we simply highlight that this may be the trigger for an upside correction in the dollar today or in the coming days”.

A quick summary of foreign exchange activity heading into Tuesday shows that USDEUR fell to 1.0236 from 1.0261 at the Monday US close and 1.0248 at the same point Monday morning.

Spanish unemployment partially rebounded in July while consumer confidence declined, data released early Tuesday showed. The next meeting of the European Central Bank is scheduled for Sept. 9. GBPUSD declined slightly to 1.2211 from 1.2254 at the Monday US close and 1.2244 at the same time Monday morning.

There are no UK data scheduled for Tuesday. The Bank of England meets next on Thursday when it is expected to continue its tightening cycle with a 50 basis point increase. READ: Oil Prices Tumble over Rising Virus Cases in Asian Countries

USDJPY fell to 130.9553 from 131.6141 at the Monday US close and 132.282 at the same point Monday morning. There is no Japanese data scheduled for Tuesday. Even with inflation rising, the Bank of Japan is expected to maintain its accommodative monetary policy stance at its next meeting on Sept. 21-22.

USDCAD rose to 1.2857 from 1.2839 at the Monday US close and 1.2773 at the same time Monday morning. Data on Canadian manufacturing activity is scheduled to be released as the Bank of Canada’s monetary policy committee meets next on Sept. 7. # Dollar Rebounds Ahead of Nancy Pelosi’s Taiwan Visit