Is the CNY back in play?

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  Developments over the weekend point to no easy path forward for US-China trade talks, and risk appetite is suffering a fresh case of whiplash after an attempt to put on brave face ahead of the weekend. An expansion of CNY volatility in Monday’s session demands our full attention.


The currency market has not been the place to look for a reaction to the ebb and flow of US-China trade talk headlines. Yes, some EM currencies have finally suffered a more notable jolt to start the week and the commodity dollars are offered on weaker risk sentiment, but an overriding sense of complacency persists.

Much of the lack of volatility, we assume, is linked not to just general uncertainty, but the assumption that the Chinese commitment to renminbi policy – the assumed 7.00 cap on USDCNY – is unshakeable. With the latest leg of the price action showing the  USDCNY rate climbing uncomfortably close to the 6.90 area (and USDCNH pushing higher still and actually touching 6.90 overnight), whether China’s response to the stand-off will include allowing the CNY to drift lower, especially as China lacks leverage to respond symmetrically on trade tariffs, given the imbalances in trade volumes between the two countries.

China’s three demands for further progression, as advanced by China’s top trade negotiator Liu He the trade negotiations look a difficult ask – especially the first one (US tariffs must be reversed) and it appears the stand-off is set to last for some time, perhaps at least until the Jun 28-29 G20 meeting in Osaka, Japan. In the meantime, traders should beware the risk of a dramatic rise in volatility in FX if China’s commitment to the 7.00 ceiling in USDCNY is abandoned. We can’t help but feel that the thousand-dollar advance in the Bitcoin price over the weekend may have something to do with speculating on that eventuality.

So both eyes on trade talks and CNY developments this week – all else pales in comparison.

Trading interest

Light positioning with some optionality in the event of a CNY weakening – USDCAD calls are far cheaper than AUDUSD puts in implied vol terms (barely over 5% for USDCAD 1-month), though this may be for good reason – a little exposure to both for the 1-month to  2-month horizon, the latter reaching beyond the late June G20 meeting in Osaka, where Trump and Xi may or may not meet. 

Chart: USDCNH

The USDCNY rate getting uncomfortably close to the top of range if the operating assumption is that China won’t step away from its commitment to the CNY floor as long as trade talks with the US are ongoing. The price action in USDCNH, the offshore version of the USDCNY rate has stretched more than half a percent beyond the move in the CNY move, nearly matching the widest spread between the two rates over the last couple of years. 
Source: Saxo Bank
The G10 rundown

USD – the greenback should remain firm, perhaps outside of USDJPY, as long as risk appetite is in the cellar. 

EUR – the euro managing to keep pace with the US dollar through the various gyrations of risk appetite, so the single currency not at most risk here seemingly, though reduced trade volumes are a risk as there are no winners in US-China trade showdown.

JPY – the yen tracking stronger in sync with risk sentiment declines and will likely remain a barometer of risk swings, fair or not.

GBP – sterling struggling near 1.3000 in GBPUSD and we don’t see any chance for near-term clarity on Brexit, leaving the currency vulnerable.

CHF – the safe haven angle on franc was nowhere to be seen recently but has now put in a sudden appearance  - is this down to the sudden fear that the CNY floor could be in play?

AUD – AUDUSD deservedly back below 0.7000 on the latest US-China trade tension concerns, the question is whether the  pair can extend into new downside territory without a CNY devaluation.

CAD - A strong close for CAD on Friday on the back of an absurd bump in Canadian payrolls (there is a long history of volatility in the data series) together with hopes that the US-China trade tensions would soon fade has yielded to a bounce that has already erased much of the sell-off. 

NZD – the kiwi seems to show less beta to China-inspired risk off, fair or not.

SEK and NOK – the Scandies showed signs of resilience on Friday’s optimistic market close, but they risk renewed tough sledding if risk sentiment deteriorates again.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992