Yuan powers up, USD eyes major resistance.

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The US-China step-down from the high tariffs, at least for the 90 days of the declared ceasefire, was the key moment of near-term capitulation for USD bears. The USD exploded through resistance yesterday and nearly rallied to the last lines of major medium term resistance in places. With the action so intense since the weekend and US trade policy so prominently seen as the major driver here, many will be scrounging around for the next trade-related headlines, but I suspect that this market will now prefer to look for new catalysts – among these the US treasury market (more below) on that.

As we watch for whether we get any follow-on momentum from the USD rally, here are some levels of note in key USD pairs:

• EURUSD: 1.1050 area, which is the 61.8% retracement of the rally from the 1.0733 low to 1.1573 high
• USDJPY: Psychologically 150.00 is critical as a closing level on a daily/weekly basis. We also have the 200-day moving average currently at 149.72 and Ichimoku traders should keep an eye on the upper cloud levels that are falling in the days ahead – currently also near 150.00. The weekly cloud is a bit higher.
• GBPUSD: the 38.2% retracement of the rally off the 1.2709 lows held with a bit of slippage yesterday (1.3163 versus yesterday’s low 1.3140). Final capitulation zone looks more like the big 1.3000 level, coinciding with the 61.8% retracement quite nicely (1.2990).
• USDCHF: we saw a nice test of the 38.2% Fibo retracement off the low at 0.8282 – 0.8500 is a psychological level and then the main zone of resistance is up toward 0.8750 – miles away, although CHF has remained remarkably resilient given the snapback in sentiment. I suspect gold is a key anchor there.
• USDCAD: 1.4000 is a huge psychological and technical area, briefly touched yesterday. Although 1.4150-1.4250 looks like the final resistance zone.
• AUDUSD: The action has been tighter here – likely due to stronger CNH. 0.6344 is local range low.

One overall note to make here: the US dollar move has vastly underperformed the snap-back in global risk sentiment and gold remains at lofty levels, suggesting that the longer-term drivers of USD weakness remain in place and that we can still frame this rally as a consolidation of a new secular trend. The confidence in this framing would only face an existential challenge if EURUSD continues lower here below perhaps. 1.0750-1.0700 and USDJPY rises above perhaps 152.00, and even then it’s more of a pressing of the pause button for more clarity after a neutralization of what has unfolded.

Chart: USDCNH
Keeping an eye on USDCNH here. While some might view it as remarkable that the Chinese currency is strengthening even more than the US dollar, we nearly always see the yuan moving in the same direction as the US dollar in the crosses – hence the massive move lower in EURCNH since the weekend. China might be allowing the currency to move more sharply as a “power flex” for PR reasons, or it could be due to pent up concerns about the Chinese economy due to the US trade policy showdown finding sharp relief. The move here is not particularly notable unless A) USDCNH is allowed to significantly drop below 7.00 or B) the currency strikes out in a different direction from the USD in the crosses versus other major currencies at some point. Some evidence, by the way, to support the correlation of the CNH with the USD: EURCNH and EURUSD have had a daily r-squared of 61.5% over the last two years, while USDJPY and CNHJPY have had a daily r-squared of 80.4.