Currency markets tread water

Stimulus talks back on

After abruptly ending talks on a stimulus package, President Trump has backtracked, saying he’s willing to discuss a trimmed-down stimulus package. The Democrats favor a larger package, but at least the two sides are talking again.

Caught between a storm of US presidential tweets and conflicting information from Washington DC, currency markets have stayed on the side-lines most of this week, having been burned buying into fiscal stimulus hopes earlier. That state of affairs continued overnight with the US dollar index almost unchanged at 93.57 as the threats of presidential induced whipsaws crush volatility.

That has seen G-10 currencies content to range-trade into the week’s end. However, the pro-cyclical Australian and New Zealand dollars have advanced this morning after a firm PBOC fix for USD/CNY and the outperformance of China data.

After an 8-day holiday, China has returned to work with the onshore yuan gapping higher to reflect the gentle retreat of the US dollar on international markets over that period. The PBOC set its reference rate at 6.7796 this morning, but USD/CNY has gapped lower to 6.7200, playing catchup to the offshore USD/CNH, which has fallen to 6.7120 as of this morning.

The jump in the yuan reflects the modest US dollar weakness over the past week, as US fiscal stimulus hopes rose, but also the outperformance of the China economic recovery on all front. USD/CNY has now broken through 6.7500, suggesting further yuan strength lies ahead. USD/CNY has longer-term support at 6.6700, and we expect USD/CNY to range between 6.6700 and 6.7500 over the next week. The yuan’s performance should also be supportive of regional Asian currencies.

For today, like equities, currency markets have put predicting the White House in the too hard box, and are likely to remain side-lined, wary of presidential tweet risk.

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