Forex Today: DXY hits five-year highs above 103.00 as yen, euro crater

What you need to know on Thursday 28 April:

A sharp reversal of recent yen strength on Wednesday, which lacked a clear trigger, saw the US dollar reclaim the top spot in the daily G10 performance table, and saw the trade-weighted US Dollar Index (DXY) hit fresh more than five-year highs. The DXY rallied to the north of the 103.00 mark for the first time since January 2017, topping out near 103.30 before retracing lower to stabilise around the big figure as US trade drew to a close.

The buck bulls were unfazed by data that showed the US Goods & Services Trade Deficit hit a new record at more than $125B in March and resulted in some analysts downgrading their estimate for Q1 GDP growth, one day before the Bureau of Economic Analysis and Department of Commerce release the first estimate of Q1 growth. Rather, expectations for the Fed to implement the first of a series of 50bps rate hikes and quantitative tightening next week, negative geopolitical newsflow and ongoing China lockdown concerns were cited by analysts as benefitting the safe-haven buck.

Regarding yen weakness, traders seemed to have taken the opportunity represented by the recent dip in many G10/JPY major pairs to reload on long positiongs, seemingly in a bet that recent risk-off flows won’t save the yen from further losses so long as the BoJ doubles down on its dovish policy stance. Speaking of, the BoJ will announce its latest monetary policy decision plus new economic forecasts during the upcoming Asia Pacific session, with any dovish vibes having the potential to exacerbate the yen’s latest drop. For reference, USD/JPY rallied more than 100 pips or 0.9% on Wednesday to the 128.30s from lows under 127.00.

Turning to the other major G10 underperforming currencies, the euro and Swiss franc were the next worst performers, depreciating 0.8% and 0.7% each on the day versus the US dollar. EUR/USD subsequently continued its run of recent losses to fall into the mid-1.0500s and with the bears eyeing a test of 2017 lows in the 1.0330s. Analysts cited the latest ramping up of EU/Russia tensions after Gazprom halted gas flows to Poland and Bulgaria (who have refused to pay for gas in roubles) as adding geopolitical risk premia to the single currency.

As the EU continues to jawbone about another round of energy sanctions that could target both oil and gas exports, fears about energy price shortage fuelled stagflation in the Eurozone remain elevated. According to some analysts, the unfavourable macroeconomic/geopolitical backdrop explains why EUR/USD has failed in recent weeks to take advantage of the ECB’s hawkish shift towards lift-off in Q3.

Elsewhere, a stabilisation in risk appetite that saw major US equity bourses close modestly in the green and stabilisation across commodity markets (aside from precious metals, which continue to be hit), helped cushion the downside in the more risk-sensitive G10 currencies. AUD/USD and USD/CAD both ended the US session flat around the 0.7120 and 1.2820 levels respectively, with the Aussie given notable assistance from hot domestic inflation figures which spurred bets that the RBA might hike rates as soon as next week.

Meanwhile, NZD/USD dropped another 0.3% to below 0.6550 but remained above its annual lows at 0.6530 and GBP/USD fell another 0.2% to below 1.2550, though support at 1.2500 held up (for now). Sterling’s better performance on Wednesday probably also owes much to the fact that over the past four sessions it has taken a historic beating as a recent string of UK economic and government borrowing data releases triggered fresh concerns about the country’s economic outlook and outlook for BoE tightening. Wednesday’s awful CBI Distributive Trades survey for April seemed to ensure that the beleagured currency did not enjoy a likely overdue technical rebound.