China data weighs on the US dollar

Currency markets continued to trade sideways on Friday, with the US dollar edging lower as markets continued to price in a US stimulus trade. Another impressive set of economic data from China this morning has lifted G-10 and regional Asian currencies modestly, as the recovery narrative takes precedence over the increasing risks in the week ahead.

The US dollar index is unchanged at 93.72, with the EUR/USD and USD/JPY unchanged, but the pro-cyclical AUD, NZD and CAD all moving 0.15% higher. GBP/USD has also risen 0.10% to 1.2930 on hopes of a Brexit trade-deal breakthrough. With zero risks of a no-deal priced into markets, sterling is the most vulnerable G-10 currency to a substantial pullback. A daily close below 1.2850 signals that a deeper correction is ahead.

Bullish yuan comments from the PBOC over the weekend, followed by an 18-month high USD/CNY fix at 6.7010 today is supporting Asian currencies in general. The USD/CNY is unchanged this morning, with support at 6.6950 not far away. A daily close below that signals more yuan strength ahead, with a substantial interest rate differential over the US (and most of the world), and positive economic data underpinning the rally.

Currency markets, in general, have taken a back seat to the recent rally in risk, not entirely buying into the exuberance priced into equity markets. That may well be a wise choice in hindsight. Markets are confronted with several threats this week that have not been remotely priced in. Brexit trade talks and Covid-19 could threaten both the euro and sterling. A disappointment on US stimulus talks and the mentally exhausting 1.5 hours of television we call the presidential debate, could all spur a quite intense bout of risk hedging this week.

The prime beneficiary of a flight to safety would be the US dollar, and to a lesser extent, the Japanese yen. Add in US elections now just two weeks away along with a large amount of market complacency, and we have the ingredients for some potentially severe volatility. In the bigger picture, I still believe that the US dollar will continue to strengthen into the US election, potentially materially so.

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.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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