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USD pullback supports risk rally

The dollar index fell 0.4% from a three-year high of 84.59 to close at 84.19, relieving pressure on the risk space as commodities and equities gained in Asia today.

All trading involves risk. Losses can exceed deposits.

Risk currency pairs have also enjoyed some relief, with the Aussie dollar being one of the biggest beneficiaries. The AUD/USD has bounced back strongly from yesterday’s lows as it found buyers around the $0.90 region. It certainly seems like the shorts are being squeezed in the near term, and we saw AUD/USD trade to a high of $0.915 late in US trade. The pair is back above the 50- and 100-day moving averages, which shows a short-term shift to the upside.

Today we have NAB business confidence along with China CPI and PPI to look out for. China’s June CPI is expected to show upward pressure to 2.5% (from 2.1% in May) and a strong reading would see AUD/USD continue its short-term run higher. Near-term resistance is in the $0.92 region.

EUR/USD also recovered in line with the risk space, and on the back of news European leaders decided to grant Greece its next tranche of aid. The pair is now trading at around $1.285 and remains fairly sidelined ahead of ECOFIN meetings later today.

USD/JPY has pulled back from its recent highs as the US dollar loses some ground on profit taking. USD/JPY is now trading just below ¥101 and we feel there is plenty of volatility on the way as we head towards the Upper House elections.

Today we have machine orders, followed by monetary policy meeting minutes tomorrow. Should the pair experience weakness in the near term, we feel buying the dips is the preferred strategy. Japan is leading the way today with a 1% gain on the back of better-than-expected money stock data (3.8% vs 3.4%). More money in circulation leads to higher inflation, and that’s the ultimate goal for Japan.

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