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Firmer USD fails to dampen risk-on mood for Asian stocks

The broad-based recovery in US stock markets overnight has created a positive feedback loop into the major Asian benchmark stock indices. As at today’s Asia mid-session, we witnessed a sea of green: Japan’s Nikkei 225 was up +0.97% (to 28,362), South Korea’s KOSPI 200 rose +1.34% (421.03), China’s CSI 300 was up +1.54% (5,501), Hong Kong’s Hang Seng index climbed +1.20% (29,240) and the Hang Seng TECH Index was +2.11% higher (9,973). Australia’s ASX 200 rose +1.50% (6,762) and Singapore’s Strait Times Index was up +0.44% (2,908).

The Singapore’s Strait Times Index (STI) is underperforming against its Asian peers after being dragged down by three bank heavyweights, which have a combined weighting of close to 38% in terms of market capitalisation: DBS Group, United Overseas Bank and Oversea-China Banking Corp have recorded losses between -0.30% to -0.40% so far.

The US dollar had continued to remain firm against the major currencies. The US Dollar Index inched higher by +0.44% to close at 90.98 in the overnight US session. From a technical analysis perspective, the next significant resistance to watch on the US Dollar Index stands at 91.20/40. A clear break above 91.40 opens up scope for a potential extension of the ongoing corrective rebound in place since the 6 January low of 89.20, towards the next resistance at 92.45.

The weakest currencies against the USD at the Asia mid-session today were the AUD and JPY. The AUD/USD had declined by 8 pips (-0.11%), after it failed to breach above yesterday's high of 0.7662, printing a current intraday low of 0.7603. The ongoing weakness in the AUD/USD pair since the 6 January high of 0.7820 was reinforced by a dovish stance adopted by the Australian central bank, the RBA, at the conclusion of its monetary policy decision meeting today, where it extended its quantitative easing programme by a further A$100 billion, and said it did not expect to increase interest rates until 2024, due to a lacklustre jobs markets. The USD/JPY inched higher by +0.03% to hover around the 105.00 psychological level, as it consolidated its prior two days of solid gains of around 70 pips.

It’s seemed that a stable USD/CNH (offshore China’s yuan) was one of the main drivers to maintaining the current risk-on behaviour seen in Asian stock markets. Since 5 January, the USD/CNH had only gained by +0.50% versus a gain of +1.6% seen in the US Dollar Index, which consists a basket of major currencies such as EUR, GBP and JPY against the USD. In addition, the risk of a liquidity squeeze in China had started to subside, with the overnight repo rate inching lower to around 2.5% from a five-year high of 3.28% last Friday, which in turn supported the current rally seen in Asian stocks.