Is the strong EUR/weak CNH & JPY prompting ECB dovish shift?
The center of gravity for currencies in Asia is the Chinese renminbi, which generally failed to make much hay out of the recent USD weakening, as it has now bounced from the lows on Friday of 7.12 to 7.22 into today’s European session. On that note, it is worth pointing out that EURCNH has gone almost vertical this year, trading above 8.10 after starting the year nearer 7.25 on concerns that China is not committing to sufficient stimulus to grow its economy as it does not want to add to already leveraged sectors of the economy.
The pronounced CNH weakness, together with the wild rise in EURJPY this year, is worth considering as a driver of the ECB’s turn to less hawkishness, with one of the most traditionally hawkish members Klaas Knot weighing in yesterday against the idea of two more hikes from here. The powerful Euro erodes the competitiveness of European exports on the world market. Can we expect the breadth in euro strength to ebb from here? German 2-year yields pushed all the way down below 3.00% at one point today, but so far EURJPY and EURUSD are not really playing ball as the air leaks out of ECB expectations – this is a space to watch, as Europe can ill afford weak growth and a strong currency. Next Thursday’s ECB is likely shaping up as a chance to deliver a message on the currency and links to ECB policy, together with no commitment to further tightening beyond a presumed 25 basis point hike (and if EURJPY and EURCNH making new highs into next Thursday, could the ECB even shock with pause?)
Elsewhere, the CNH weakness is holding back AUD and NZD in the crosses, with NZDUSD on the verge of a full bearish reversal if it moves much lower, and AUDUSD likewise. Further USD strength in these pairs would add to the cracks in the weak USD picture.
Table: FX Board of G10 and CNH trend evolution and strength.
USD weakness is leaking out of the picture quickly here, but the greenback has not yet strengthened enough to threaten a reversal, particularly not within the G3. Note that CNH weakness is now eclipsing USD weakness. The sterling jolt lower has not neutralized its former broad up-trend. If euro outperformance is set to ease as we discuss above, the Scandie snap-back rally may not have much follow through potential.