Global Head of Macro Strategy
Résumé: The US dollar surged yesterday as USD bears capitulated on the US-China trade détente. The Chinese renminbi was stronger still. But after this capitulation, markets may look for new catalysts away from trade. The US treasury market may prove the next focus (again).
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The US-China step-down from the high tariffs, at least for the 90 days of the declared ceasefire, was the key moment of near-term capitulation for USD bears. The USD exploded through resistance yesterday and nearly rallied to the last lines of major medium term resistance in places. With the action so intense since the weekend and US trade policy so prominently seen as the major driver here, many will be scrounging around for the next trade-related headlines, but I suspect that this market will now prefer to look for new catalysts – among these the US treasury market (more below) on that.
As we watch for whether we get any follow-on momentum from the USD rally, here are some levels of note in key USD pairs:
One overall note to make here: the US dollar move has vastly underperformed the snap-back in global risk sentiment and gold remains at lofty levels, suggesting that the longer-term drivers of USD weakness remain in place and that we can still frame this rally as a consolidation of a new secular trend. The confidence in this framing would only face an existential challenge if EURUSD continues lower here below perhaps. 1.0750-1.0700 and USDJPY rises above perhaps 152.00, and even then it’s more of a pressing of the pause button for more clarity after a neutralization of what has unfolded.
Chart: USDCNH
Keeping an eye on USDCNH here. While some might view it as remarkable that the Chinese currency is strengthening even more than the US dollar, we nearly always see the yuan moving in the same direction as the US dollar in the crosses – hence the massive move lower in EURCNH since the weekend. China might be allowing the currency to move more sharply as a “power flex” for PR reasons, or it could be due to pent up concerns about the Chinese economy due to the US trade policy showdown finding sharp relief. The move here is not particularly notable unless A) USDCNH is allowed to significantly drop below 7.00 or B) the currency strikes out in a different direction from the USD in the crosses versus other major currencies at some point. Some evidence, by the way, to support the correlation of the CNH with the USD: EURCNH and EURUSD have had a daily r-squared of 61.5% over the last two years, while USDJPY and CNHJPY have had a daily r-squared of 80.4.
The next key: the US treasury market?
We have seen US long yields jumping a bit higher again here on the rebound in risk sentiment and the hope that Trump’s trade policy won’t derail the US economy. The downside risks to US economic data for the May-July data cycles have certainly been reduced by the step-down from the tariff threat, though we do have a “hangover” risk that the US economy may have been a bit artificially juiced in the first four months of the year by the scramble to front-run the impending tariffs. Hard to know. Regardless, Treasury Secretary Bessent’s declared policy aim has been to engineer a reduction in the US 10-year treasury yield, which he has not yet achieved. That yield has nearly touched 4.50% on this latest run-up. I am convinced that the risks of incoming USD-bearish policy from Bessent and company aimed at capping long US yields rises with every tick higher above 4.50% and especially above 4.75% if we get there. (SLR rule changes for banks allowing them to hold more treasuries without penalties is the widely seen first step in that direction.) The only thing that might tamp down longer yields without intervention would be a string of weaker US data suggesting an incoming recession, which would also be USD bearish. In short, the window for more USD upside is there, but I don’t see it as a large one.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
This latest surge has almost entirely neutralized the USD weakness, with the CNH actually in plus now after its recent brutal strengthening move. The JPY is getting the worst of it on the combination of higher global yields and strong risk sentiment which encourages carry trading. Given the big follow through higher in the US dollar since the weekend, gold’s hold within the range is pretty remarkable.
Table: NEW FX Board Trend Scoreboard for individual pairs.
USDJPY has now backed up so viciously that our trend indicator has it in a positive trending mode – that’s a bit premature, though I was very wrong about the outlook for the trends in the JPY crosses, which have blasted higher – note GBPJPY – though without yet breaking major ranges.
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