Latest CNY boost now the chief driver of USD weakness

Yesterday’s session at least partially eroded confidence that we are seeing the unfolding of a broadening rout for the US dollar, as EURUSD dipped back toward 1.1500 rather than following through higher,  and USDJPY found support, while USDCHF and EURCHF jumped higher. More on that below.

For now, it appears the chief new driver of USD weakness is China’s persistent move to strengthen its currency, perhaps an attempt to provide additional goodwill as we have yet to see an announcement on a purported trade deal. China’s top trade official is headed to Washington for further talks, offsetting some of the relief from recent conclusion of lower level trade talks.

Relying on China to drive a weak USD story is less appealing than the dovish Fed story (for now, the Fed has downshifted as far as it can, and the issue from here is the challenge of circular logic as further Fed dovishness requires signs of strain in financial stability measures, which then sees the Fed more cautious, which then eases financial conditions and allows the Fed to stay on track with QT, etc…).

We could be playing that game for some time while we await incoming data. As for the CNY, there are certainly grounds for fearing that CNY is being man-handled as a backdrop in the top-level US-China trade talks.

The Swiss franc move was sufficiently large to demand an explanation, one we’re not entirely sure we can provide, but perhaps the recent evolution of the Brexit situation is a key factor: the idea that no matter what, the UK political leadership will not pursue a no deal Brexit. There is increasing consensus that we are headed toward a significant delay to the Article 50 deadline, a delay that could add to sterling risks on negative implications for the UK economy.

Risks to the economy, however, on uncertainty over the terms of Brexit are not the kind of risks that would drive significant flows into a Swiss franc safe haven on the feared “cliff edge” scenario on risk of systemic financial system disruptions. An interesting opinion piece yesterday from Bloomberg aired the idea that May could appeal to a non-partisan spirit and get some of the Labour opposition into the process of defining the next step for the Brexit process, given the stark divide within the Tory party. Regardless, we are far from a Brexit solution but also far from a cliff edge Brexit of any stripe and CHF looks rich. GBP implied volatility is dropping quickly. 

Chart: EURCHF

A sharp move in EURCHF after a choppy poke at the key 1.1200 area. Trend-lines are threatened here and with no immediate EU existential risks on the docket, there could be room to run to the upside here into the next obviously pivotal area toward 1.1500.