Head of FX Strategy
Summary: The late strengthening in the Chinese currency has taken on strong new momentum this week and may be behind some of the broader pressure on the US dollar ahead of an interesting Retail Sales report tomorrow as well as the FOMC meeting and the latest economic and policy projections after the US recovery has outpaced expectations from its June forecasts.
Trading focus:
The US dollar and in particular, whether the Chinese renminbi is the driver
USDCNH moving more aggressively – a rare show of more volatility in CNH than other major currencies..
The sell-off in USDCNH has accelerated this week and even taken the exchange rate down through the 200-week moving average for the first time in more than two years. The move this week is a rare development, in that the CNY (and CNH) is strengthening more rapidly than other major currencies. What China’s intentions are here in taking its currency so much stronger versus the greenback are tough to discern, but its commodity buying binge means that it is paying less in CNY terms for its purchases and some tout that China is taking a tighter approach to stimulus than elsewhere to avoid bubbles in domestic asset markets.
The Chinese currency move is so aggressive that it may be behind the broader US dollar weakening in evidence ahead of tomorrow’s FOMC meeting. There is little anticipation that the Fed is set to bring new guidance to the table after recently rolling out the results of its long-term policy review and its intention to move toward an average inflation targeting (AIT) regime that would see it slow to react to any rising inflationary pressures, but the Fed can’t avoid making some impression of its stance as it will provide its latest projections for the economy and monetary policy for the first time since June, when the US economy was still in the very early days of the bounce-back from the COVID-19 outbreak.
Chart: USDCNH
The pace of the Chinese renminbi strengthening has turned more aggressive this week, as USDCNH sliced down through its 200-week moving average overnight and below 6.80 for the first time in over 2 years. It’s worth noting that the renminbi is launching a comeback from near its lowest levels in the official basket. A pair like EURCNH is worth watching for relative strength after that exchange rate broke above what appeared to be almost a ceiling near 8.00 stretching all the way back to 2017. After peaking above 8.30 at the end of July, that exchange rate is back down to 8.06.
Broader USD technical levels
As we await August Retail Sales and the FOMC meeting tomorrow (more on that above), we focus on the broader technical status of the US dollar after a rather weak consolidation period saw the greenback unable to take out important resistance. The focus for EURUSD is on the 1.1900-1.2000 zone after the pair found resistance right at the 61.8% retracement of the sell-off from the 1.2000+ at 1.1912.
Elsewhere, USDJPY is coiling interminably within a shrinking range and can’t help conjuring at least a false break soon – first levels there are 105.00 to the downside and 107.00 to the upside. AUDUSD had a poke at new local high overnight before fading a bit – underlining the sloppy and choppy upside trend – really needs to stick a close below 0.7200 to start breaking things there.
GBP still on edge as we await fate of Brexit Bill
Boris Johnson’s Brexit Bill, which would give the UK government the mandate to override portions of the original Brexit withdrawal agreement, has passed its first test in a long path before it can become a law, but this news was not met with any market reaction and the pressure on sterling has eased slightly, perhaps on a number of prominent UK Conservatives coming out to speak against the bill, while Boris Johnson insists that retaining the ability to move against parts of the withdrawal agreement is vital for leverage in negotiating the post-transition period trade deal, as he complains that the EU is leveling “absurd” threats in the latest round of talks. Support for EURGBP comes in at perhaps 0.9200-0.9175 and resistance in GBPUSD is perhaps 1.3000 or even a bit higher, given the size of the recent fall.
The G-10 rundown
USD – the greenback weaker, and most impressively in EM, with the USDCNH move in the driver’s seat there. Within G10, need to see if the FOMC meeting can move the needle tomorrow. Suspect it will be difficult to get strong directional momentum in the US dollar until post-election – generally looking for longer term downside potential with short-term uncertainty.
EUR – tough to build a strong case for the single currency as the EU is the new epicenter of COVID-19 cases, investors are unable to take European equities out of the range, and after the ECB meeting last week failed to spark more confidence in the currency. But lack of upside doesn’t mean downside, so bargain hunters may yet be frustrated.
JPY – someone wake us up when USDJPY close above 107.00 or below 105.00, until then merely looking for directional sympathy for USD and JPY in the crosses.
GBP – still waiting for a breakthrough in Brexit negotiations and whether Boris Johnson’s Brexit Bill can pass through parliament. Positioning in options market with call or put spreads the lowest risk way to trade a volatile move once the situation clears up either way in months to come.
CHF – weekly sight deposit data from the SNB out yesterday shows the bank continues to intervene and the recent EURCHF rally was once again unable to hold. Locally, watching whether the SNB allows the EURCHF rate to fall meaningfully below 1.0700 as well as whether the market will challenge the twice-tested cycle low in USDCHF near 0.9000.
AUD – the AUD marginally boosted overnight by the RBA minutes discussing the Aussie as “broadly aligned with its fundamental determinants” like higher commodity prices, they would like it lower. Strong Chinese data also a boost at the margin, together with firm commodity prices and the recent potent CNY rally. AUDUSD is frustrating to trade in the messy ascending channel – new highs don’t feed much additional momentum and bearish reversals don’t develop either.
CAD – the 1.3000 area in USDCAD is a critical chart point, with CAD held back a bit more here on the weakness in oil prices that doesn’t fit with strength in the commodities complex elsewhere. To the upside, the 1.3300-50 area is important resistance if USDCAD bears
NZD – last week’s AUDNZD rally from important support above 1.0800 has stumbled as the hurdle for the RBNZ to out-dove the competition seems to be quite high and will require an even stronger move into negative rates than the market is pricing for next year to impress.
SEK – EURSEK managing to find resistance near 10.40 as a bigger squeeze on SEK longs is avoided as long as risk sentiment generally stable even as wobbly EU outlook on COVID resurgence is one of drivers taking EURSEK off the cycle lows.
NOK – EURNOK has failed to burst higher to the next major resistance line above 10.75 as the oil sell-off has been corralled. The August Regional Network Survey for Norway was nothing to write home about – a tiny improvement to 0.19 from 0.08 in July.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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