Head of FX Strategy
Summary: China moved to stem further advances in its currency a day after the yuan traded to sharp new highs for the year against the US dollar, suggesting it would like a halt to its appreciation. This helped boost the US dollar ahead of the November CPI print later today, which is the last major data release ahead of a pivotal FOMC meeting that will see the most major guidance shift since the outbreak of the pandemic.
FX Trading focus: China moves against strong CNY. USD eyes CPI
China suddenly moved against the CNY strength yesterday, first announcing an increase in the required FX reserve ratio for domestic banks and then setting the yuan fix far weaker than expected. This came the very day after USDCNY and its offshore equivalent USDCNH slipped to new lows for the year beyond those established back at the end of May. The timing is not to be second guessed here as China clearly wants to put a ceiling on its currency here, a move that also comes as the official CNY basket has risen to the highest levels since it was defined in late 2015. With this signal, many will be happy to assume that China wouldn’t mind some further mean reversion in its currency and for USDCNH to drift back toward the summer range highs of 6.50 at minimum. Relief on the commodity inflation front (at least crude oil) may be behind some of the move, as well as an attempt at slowing speculative inflows linked to its shift to a policy easing stance.
The modest pump higher in EURUSD on Wednesday now appears clearly inspired by that last leg down in USDCNH, just as yesterday’s sell-off in EURUSD fit with the move by Chinese regulators that sharply reversed the USDCNH move. After this adjustment, further downside in EURUSD will likely require new highs for Fed expectations, which are pushing on the highs of the cycle ahead of US data and next week’s FOMC meeting.
Elsewhere, the focus is squarely on the US November CPI release later today, which is expected to eclipse the highest levels of the early 1990’s and post the highest level since 1982 at 6.8% year-on-year for the headline and an approximately 30-year high at the core of 4.9%. In a curious development, US White House economic adviser Brian Deese was out attempting damage control on this number even before the release, saying that the inflation data today won’t take into account falling prices for key commodities like gasoline and natural gas. The desperation is certainly on show.
In today’s Saxo Market Call podcast, we noted once again that the University of Michigan sentiment survey suggests a very unsettled consumer, where it unprecedented to have very low unemployment numbers (normally confidence is more linked to the availability and security around employment) with very low confidence. According to the UMich survey, sentiment levels are back near the bad phase of the post-financial crisis months of 2009. In looking into why this survey is so dramatically at odds with the Conference Board Consumer Confidence number, which has only dipped slightly of late, I suspect that it is some of the questions in the UMich survey that are not in the Conference Board survey that may be driving this remarkable divergence. Those surveyed in the UMich are asked about “personal finances” and especially “buying conditions”, two areas that have not doubt deteriorated badly on the breakout in inflation. The Conference Board survey is more focused on employment.
Chart: EURUSD
Watching Fed rate expectations in the wake of today’s US CPI release for how the market treats EURUSD here, where the last couple of sessions have likely been buffeted by sharp swings in USDCNY as noted above. The EURUSD slide has largely tracked the widening short yield differential between the two currencies, and the last major wave lower that broke down through 1.1500 materialized in the wake of the October CPI release on November 10. Whatever the level of the US CPI data today, we’ll likely need new cycle highs in short US rates to get EURUSD below the sub-1.1200 lows and on the path toward 1.1000 ahead of the FOMC meeting next Wednesday, when the market will get a sense if it has adjusted sufficiently to the new focus on inflation at the Fed.
Next week’s Economic Calendar
Next week is a busy one, to say the least, and mostly on the central bank front with the US FOMC Meeting up on Wednesday, and the SNB, Norges Bank, ECB, BoE and Norges Bank on Thursday. We’ll preview the FOMC, ECB and BoE meetings further next week, as all of them look pivotal. Norges Bank forecasted a hike next week long ago – guidance the focus there. The Bank of Japan will meet on Friday amid expectations of a tapering of some of its corporate bond QE. The Russian Central Bank also meets Friday and is expected to hike another 100 basis points to take the rate to 8.50% after core CPI for November rose to 8.7% year-on-year and 1.14% month-on-month, the highest since 2015.
On the economic data front, we have the US Retail Sales up on Wednesday, with preliminary PMI’s from all major economies on Thursday.
Table: FX Board of G10 and CNH trend evolution and strength
The coming few days through the FOMC meeting critical for the USD outlook after support came in for the greenback yesterday. CNH is likely done for the cycle in terms of its broad strength, as noted above after the signal from regulators.
Table: FX Board Trend Scoreboard for individual pairs.
Individual pairs for reference below – as we have noted recently, the “energy level” across FX is quite high in terms of daily trading ranges (the color of the ATR in orange and bright orange), although interesting to note the exceptions like EURGBP (very quiet), GBPUSD, EURUSD and USDCNH notwithstanding last few days. Note USDCHF trying to flip back higher after its recent sell-off.
Upcoming Economic Calendar Highlights (all times GMT)
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