Running with the Yuan Bulls

Running with the Yuan Bulls

An extremely active month end as the dealing desk was abuzz digesting numerous conversations and themes.Currency markets were grappling with a  sagging US dollar and falling US Treasury yields. While equity markets were a bit wobbly as oil prices remain slippery and investors are expressing concern that the market is looking a bit extended.

The US dollar continues to sour as the recent string of poor to middling US economic data weighs negatively on US rate hike expectations beyond June

The ever so slight wobble in equity markets could be a  sign that investors are growing more cautious about the US  economy amidst external concerns around  Chinese growth and euro zone stability.

While numerous currency  subplots unfold, unquestionably the headliner is  the Chinese Yuan

Chinese Yuan

China stumps market pushes yuan to 7-month highs

The Pboc has let the  Yuan bulls loose in the China shop. Extremely hectic 24 hours on the CNH post after USDCNH  toppled ten big figures. While some  explanation behind the move can be offered up about funding cost impact, the weightiness  of the  move   cannot be explained by funding alone and is probably  linked to the start of an overall CNH and CNY policy shift

Needless to say, the market is a tad  shell-shocked this morning while searching  for some policy clarity from the Pboc

While there remains some politics in play after the Moody’s downgrade, with numerous projects recently tabled  through the one belt one road initiative, the stronger Yuan could be in China’s best interest to promote yuan internationalisation and attract more investment

On a fundamental basis, PBoC’s  shift in interest rate policy could be adjusting investors expectations. While the Pboc rate hikes were interpreted as in lock step with the Federal Reserve Board tightening, beyond June, the Fed interest rate view remains extremely clouded, so the shifting  differentials will most certainly ease capital outflows and lessen domestic demand for US dollar

The USDCNH collapses 250 pips after a stronger than expected fix likely driven by 3-day Tom next trading above 100 pips per day

Euro

Despite the mixed headlines, negative EUR inflation data, and a very cautious sounding Draghi, the  EURUSD powered higher overnight as investors become more convinced the ECB will signal a shift in forward guidance. It was all aboard the Euro Express as fear of missing the boat mentality on changing  ECB policy is far too beguiling for traders to pass up. While yesterday’s   Reuters “sources” article stoked the EURO Bulls fire, investors went all in after ECB member Weidmann affirmed the markets  ECB view.

Australian Dollar

Soft commodity prices continue to undermine the Aussie dollar which is struggling for momentum despite broader USD weakness. Iron ore prices remain at the heart of the matter amidst China growth concerns. But sliding oil prices have compounded the view putting pressure on all commodity-linked currencies.

China concerns are mounting despite the beat on yesterday PMI as the actual impact of higher funding cost have yet to be realised in the manufacturing and service sector.

Aussie appears to be hanging on by a thread, and if weren’t for the dwindling  Fed rate hike expectation beyond June, the Aussie could be trading well below the .7400 handle.

Oil remains on a very slippery slope as traders continue to hammer prices lower in total defiance to OPEC production cuts. Speculators will continue to throw down the gauntlet amid concerns about the growing supply glut more so as US rigs continue to ramp up production.

API reported a draw of 8.67 million barrels of US crude oil and coming at a timely reprieve for prices.But given the market’s current resolve it’s more likely the knee-jerk  is faded rather than extended as conversation around oil remains very bearish

While external drivers should remain dominant, this morning CAPEX and Retail sales data could produce a limited rise, but the tail risk is most certainly for weaker prints with the Aussie precariously perched at.7425

Post Data 

AUD has moved up reacting to a good retail sales data and a decent looking CAPEX number. Level now 0.7440 from around 0.7427 going into the data but was smacked mercilessly after the China May Caixin Manufacturing PMI entered the dreaded contraction zone for the fist time in 11 months 49.6 versus 50.1 expected. Things are looking very soggy for the Aussie this morning.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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