The U.S. dollar rally took a breather this week with a move lower in yields, on Friday after the US jobs report the shorter tenors in Treasuries sold off sending yields higher. The report gave renewed hope a hard landing will be avoided and at the same time the slowdown in earnings growth and the uptick in the unemployment rate suggest the Fed might lean to pause its rate hikes, or at least temper it. Dollar buying accelerated into the European close with the euro, pound and yen selling off. The commodity currencies led by the Australian and Candian dollars kept pace with the US dollar, meaning AUDJPY, EURCAD and NZDJPY lifted along with the stock market as markets are pricing in improved global growth outcomes. The RBA and BOC also meet in the week ahead.
Gold was little changed at $1,948 this week after selling off hard Friday. Overall, the dollar index (DXY) fell by 0.2% to 104.02 this week.
Forex Weekly Analysis and Outlook – US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Chinese Yuan, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate.
Over the past few weeks, the Greenback has rebounded after being down about 8.5% from a peak last September, as measured by the US Dollar index or the WSJ Dollar Index. The Chinese Yuan has been particular weak with the PBoC meanwhile is trying to slow recent CNH weakness vowing to curb speculation following a drop to 7.0750, its weakest since December.
It had been the worst start for the dollar to the year since 2018 with the interest rate forwards feeding the pullback as they price in the terminal rate for the Federal Reserve to end its most aggressive program of interest-rate increases since the 1980s.
Large USD Shorts Pressured
Last week we shared that there were hints there are large shorts out there still and we are a long way from the DXY almost hitting 115 on September 28th last year. There is a thought that the deluge of central bank rate hikes is nearing the end as the world topples into recession. With the Fed higher for longer flow this week, short covering was triggering. This was seen most in the dollar yen.
The dollar had been oscillating lower on pricing of the end of the Fed’s tightening cycle, that has reversed over the past few weeks, with a combination of short covering, higher interest rates and safe haven buying. These popular macro trades tend to be risk on or risk off and feed each other, the forex moves accordingly flow into other big shorts such as bonds, U.S. tech stocks (NVDA this week’s star long), and commodities, and European equities.
We have seen a reversal of the speculation the Federal Reserve is approaching terminal rate and will slow the pace of its interest-rate hikes while other Central Banks are unabashedly raising undermines the US dollar. This week’s strong US data in PCE and durable goods on Friday fed the higher for longer trade. Many of the more astute players are and had been short the dollar as the KnovaWave matrix pronounced peak dollar in November and December. Since then, profits have been taken and reversed.
Geopolitically the landscape is constantly evolving since the Russian invasion of Ukraine, China’s Xi’s power grab and Covid lockdown protests, a move to the right in Italy and Russia’s annexation in eastern Ukraine of territories, after taking Crimea in 2014 and a divisive election in Brazil and the US deepening partisan divide.
With rhetoric picking up from the more fascist or leftist leaders of the world we saw China and Brazil agreed to trade in their own currencies instead of the U.S. dollar. Ostensibly it was a nod to Russia versus the West.
We continue keep eyes on the bond market, as we have said the US 10-year Treasury peaked around 4.33% on the same day as the US dollar peaked against the yen USDJPY 151.95 on October 21.
To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.
We have seen the USD pull back significantly from highs but the strong dollar negatively affected multinational earnings and the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said last month. Just 28% saw the currency strength as unlikely to have any impact.
Weekly Recap and Outlook
How Foreign Exchange Prices Finished June 2, 2023
- For the week, the U.S. Dollar Index slipped 0.2% to 104.02 (up 0.5% y-t-d). 2022 gains were 8.2%
- For the week on the upside, the South Korean won increased 1.5%, the Australian dollar 1.4%, the Canadian dollar 1.4%, the British pound 0.9%, the Brazilian real 0.7%, the South African rand 0.6%, the Norwegian krone 0.6%, the Japanese yen 0.5%, the Mexican peso 0.4%, the Swedish krona 0.4%, the New Zealand dollar 0.3%, and the Singapore dollar 0.1%.
- On the downside, the Swiss franc declined 0.4% and the euro dipped 0.1%. The Chinese (onshore) renminbi declined 0.49% versus the dollar (down 2.82%).
Yields are one of the biggest influencings on currency prices. The bond market focus has shifted towards fundamental developments and away from monetary policy.
U.S. Treasuries ended the holiday-shortened week on a firmly lower note with shorter tenors leading the selling which reversed a good portion of this week’s gains. The bond market compressed the 2s10s spread by six basis points to -82 bps. The 2-yr note yield fell five basis points to 4.51% and the 10-yr note yield fell 11 basis points to 3.69%. Uncertainty about the debt ceiling finally eased after a deal was passed by both chambers of Congress.
The catalyst Friday was the Employment report for May, which saw the NFP crush expectations (actual 339,000; consensus 190,000) however at the same time average hourly earnings growth slowed to 4.3% y/y from 4.4% in April, and the unemployment rate increased by 30 basis points to 3.7%.
US Yield Watch
- 2-yr: +18 bps to 4.51% (-5 bps for the week)
- 3-yr: +16 bps to 4.14% (-9 bps for the week)
- 5-yr: +14 bps to 3.84% (-9 bps for the week)
- 10-yr: +8 bps to 3.69% (-11 bps for the week)
- 30-yr: +5 bps to 3.88% (-8 bps for the week)
The Strong US Dollar Effect on US Economy and Rates
The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.
The survey of 40 economists was conducted Oct. 21-26.
- 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
- 38% said the policy makers would be forced to cut rates earlier than expected and
- 18% said the Fed would not be able to raise rates as much as planned.
- Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.
The Fed as expected raised another 75 basis-points last meeting. Their last forecast showed rates reaching 4.4% by year end from a current target range of 3% to 3.25% and to 4.6% in 2023. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.
“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”Anna Wong (Bloomberg chief US economist)
The surge in interest rates and the de-risking of the world is one factor but there are other particular influences. With regards to volatility in currency markets, these huge moves act like rubber bands when its crowded. The more stretched an exchange rate is, the bigger, faster and more painful the eventual correction. What is the catalyst? There is the obvious, a peace deal in Ukraine or a dovish Fed, which after Chairman Powell’s speech at Jakson Hole that appears to need a dramatic change.
However, it is usually something not expected that creates major shifts. The reality is the recovery from the pandemic is not yet complete and we have the specter of a US recession darkening the scene. The strong dollar adds to the pressure to tighten as weak currencies exacerbate imported inflation.
John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”
Euro – EURUSD
EURUSD has continued its reversal off the sphere of influence congestion, picking up speed after breaking the Tenkan strait to Kijun support which we closed at. Below there we have the 106.50-1.0700 and cloud top. Completive following the throwover to the 20-year low at $0.9535. Resistance the tenkan and sphere of influence.
On the way down Euro had been cascading in what seems like eternal flags in the channel as it spat the Tenkan. This pattern is one to watch moving forward should it remerge. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility.
Now that has flipped European growth momentum builds as the impact of the Ukraine war eases while market pricing anticipates US monetary policy easing earlier and more rapidly than in Europe.
Keep in mind prior recoveries had all lead to failure, the July attempt at a bullish breakout above previous resistance at 1.0270 failed and from there the Euro tumbled. EUR/USD bulls were unable to push the pair meaningfully above the long-term previous-support-turned-resistance level at 1.0350. That comes in from the low set at the start of 2017 and overlaps the 50-day EMA which has defined the downtrend over the last six months within the downtrend channel.
The Effects of Euro Depreciation and Response
“We can be gradual, but we should not be slow and delay normalization until higher inflation expectations force us into aggressive interest-rate hikes,” ECB’s Villeroy said Saturday. “What remains essential, however, is to be orderly, in order to avoid undue market volatility and ultimately economic volatility.”
Analyzing that move through Parity
The Euro did finally breach parity in July, if you recall the first attempt recovered off lows earlier this year after Dutch central bank chief Klaas Knot said if inflation continues to climb then rates may need to be raised 50bp, this was the first time such an aggressive shift has been suggested. However, it gave all those gains back. The low just over 1.5% away from reaching parity with the dollar. It was all the way back in 2002 that the euro and dollar last reached parity. The Euro reversed off the lowest closing rate since 2017 at the outer channel extended gains to above $1.07 before settling back lower again. The short covering rally enabling a reloading of US dollars. From there we got the sharp lows below parity which we are now correcting.
The European Central Bank continues to lag behind the Fed in tightening monetary policy, ECB President Christine Lagarde said earlier this month, noting that the euro area’s economy is likely to absorb a greater blow from the war in Ukraine.
British Pound – GBPUSD
The British pound tested the top of the channel break after lower since its double top and identified sphere of influence at 4/8. The question is the consolidating a corrective wave higher since it responded to its vicious move down in July to blast out of the sphere of influence to the cloud base and has since retraced to the median after hitting the 50% (as shown) and reversing. Support is the channel, at the Kijun and 100dma support at 1.2287. Below there is the March 24 low at 1.2190, the 1.2000 psychological level at the cloud top.
Cable’s Chikou balanced at week’s end with that power move off the tenkan. Last year GBPUSD reversed after 1985 lows & spat fib extension 1.618 level 1.1432 with previous low & -1/8. Above channel Tenkan confluence & sliding Kijun. Use Fibs and MM
The Pound Crisis
The pound against the dollar fell to its lowest level since the end of Bretton Woods, reaching $1.0350. The BOE’s measures to address the threat to systemic stability helped spur the initial short-covering rally in sterling that lifted to a high at the end of the week of about $1.1835. The move met and broke a technical retracement objective ~61.8% of the leg lower that began on September 13 from almost $1.1740. Sterling overcame resistance in the $1.1275-$1.1300 area to signal a deeper recovery.
Euro Pound – EURGBP
EURGBP screams false breaks. After exploding higher to 8/8 at .93 it reversed to back test the 50wma and cloud break to the outer median line where it advanced significantly through the top of the channel back through 86. EURGBP has dribbled higher out of the support at the sphere of influence.
Factor in that Asia is the epicenter of technology manufacturing – with the global “tech” Bubble in grave jeopardy. The confluence of China’s bursting Bubble, Japan’s foolhardy monetary policy gambit, and highly levered systems puts Asia today on a Collision Course with rapidly deteriorating macro and micro fundamentals. I’ll assume mounting hedge fund and derivative issues.
The yen remains key for the overall currency matrix. We have a new BoJ coming in and YCC future tinkering will affect the dollar, Aussie and yuan. The currency had been the worst performing major currency in 2022, sliding against the US dollar but then corrected hard. Relative to a basket of trading partner currencies and adjusted for inflation, the yen fell to levels last seen before the 1985 Plaza Accord.
Hong Kong Dollar Under Pressure
“The Hong Kong Monetary Authority intervened to prop up the local dollar for the first time since February as carry trades against the currency push it past the weak end of its trading band. The HKMA bought HK$7.1 billion ($905 million) worth of the city’s dollars on Monday, shrinking the city aggregate balance, a measure of interbank liquidity, to HK$69.9 billion.”April 3 – Bloomberg (Chester Yung and Matthew Burgess)
“Hong Kong’s interbank liquidity is approaching the lowest level in three years following a series of intervention by the city’s de facto central bank to defend the local currency’s peg to the dollar. The Asian financial hub’s aggregate balance stands at HK$57.2 billion ($7.3bn) Friday, a whisker away from the HK$54 billion floor seen in much of 2019 and early 2020.”April 13 – Bloomberg (Chester Yung)
Japanese Yen – USDJPY
In Japan persistent inflation and a change in leadership at the central bank are boosting expectations that the Bank of Japan (BoJ) could move away from its highly accommodative policy stance in the next few months. We saw this the prior week when the yen fell across the board after the Bank of Japan said it would maintain ultra-low interest rates as expected, and unanimously decided to make no changes to its yield curve control (YCC) policy. The Japanese currency plunged to its lowest since September 2008 against the euro, and its weakest level in seven weeks versus the dollar THE EURJPY rose 1.5% against the yen at 150 Friday.
Eyes on the new BOJ Governor:
The dramatic final moves last year on the yen stemmed from The Bank of Japan adjusting the central bank’s yield curve control program with saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange.
The move followed the yen recovery picked after the softening of the November CPI prompted heavy selling in the US dollar and buying of bonds and a surge in US stocks. That led to a multi decade single day move lower of -3.5% in the USDJPY on the Thursday and another -2% Friday, losing 5.7% on the week”. Let’s be clear here, USDJPY was one of the most overcrowded trades with heavy BOJ intervention over the past few months. Intervention doesn’t always work, it’s a matter of timing and teamwork. Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said. Following the FOMC meeting the Yen was also the strongest currency in the rebound.
Dollar strength until this week has been seen hardest on USD/JPY, accelerating with a break higher, this week we saw a respite around the 140/141 congestion from last years move. Dollar Yen was extendeded having risen in 10 of the past 12 trading sessions, one of those falls just 6 pips. A 600 pip move essentially straight up taking out last November’s high at 140.72. This week after spitting that high USDJPY fell 4 days and bounced on the fifth, Friday.
We now watch this move if it is correcting the move of last year and for another leg up or we are merely in an ABC correcting that peak.
Let’s revisit last’s years for levels. USDJPY power move was clinical, it pushed to a new high at levels last seen in 1998. Prices confirmed a breakout above 139.391, the previous 2022 peak from July. The move higher was fueled after it corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. USDJPY traded to 145.89 above the 78.6% Fibonacci extension at 140.636 and 100% level at 143.425. Above here was the 1998 peak at 147.65. Eventually the USDJPY topped out at 151.95.
Key support now is the 50wma and MML’s. The move closing above the Tenkan three weeks ago powered the move. USDJPY spat 8/8 with a 151.95 high back to the Tenkan, energy has rebalanced since then. Chikou has not yet rebalanced on the up-move last week. Use your USDJPY Murrey grid for now. EURJPY & AUDJPY will determine risk on/off. The Tenkan is the natural balance of here.
“Japan’s top currency official warned that the government would take action if needed in comments that follow a weakening of the yen to its lowest levels since last November. ‘It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable,’ top currency official Masato Kanda told reporters after the first meeting of Japan’s Ministry of Finance, the Bank of Japan and Financial Services Agency since March. ‘The government will continue to closely monitor market moves, and will take appropriate responses if necessary.’”May 30 – Bloomberg (Go Onomitsu and David Finnerty)
The impulsive leg higher earlier in 2022 came from The Bank of Japan reinforcing its commitment to low interest rates despite the rising inflation. The BoJ said it would purchase 10-year Japanese government bonds at a yield of 0.25% every business day to ensure that the yield doesn’t exceed that level. That sent the yen weakening to more than 130 to the dollar for the first time since April 2002.
“Japan’s currency interventions have been stealth operations in order to maximize the effects of its forays into the market, Finance Minister Shunichi Suzuki said…, after the government spent a record $43 billion supporting the yen last month. Bank of Japan Governor Haruhiko Kuroda, however, reiterated the central bank’s resolve to keep interest rates ultra-low, indicating that the yen’s broad downtrend could continue… ‘There are times when we announce intervention right after we do it and there are times when we don’t,’ Suzuki told a news conference… ‘We are doing this to maximise effects to smooth sharp currency fluctuations.’ The finance minister repeated his warning that authorities are closely watching market moves and will not tolerate ‘excessive currency moves driven by speculative trading’.”November 1 – Reuters (Tetsushi Kajimoto and Leika Kihara):
“Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki)
It was a grim year for the yen, its worst year on record falling to 144.99 per dollar, a 24 year low, fueled by the selloff in Treasuries widening the yield gap between the US and Japan. It went another 5 yen from there.
Where it all started for the Yen
The BoJ has said Japan’s cyclical position with low core inflation and a more limited rebound in economic output warrants an easier monetary policy stance compared with its G10 peers. A strengthening dollar also tends to weigh heavily on emerging markets currencies, a rising dollar makes dollar-denominated debt more expensive for emerging nations to repay. The Bank of Japan chief Kuroda speaking at the G7 said BOJ will patiently continue with powerful easing announcing no change to monetary policy.
On the way up the price accelerated after the close above the Tenkan over 114 hence the pull for it to correct to the Tenkan which it did to ignite this rally a month ago. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel.
Yen weakness places Chinese manufactures at a competitive disadvantage, which has emboldened Beijing to play the currency devaluation card in an attempt to mitigate mounting economic woes and dumping of Chinese assets. Higher-yielding Chinese debt securities are losing their relative appeal (in a rising yield world), and now even the perceived stability of the Chinese currency is in question.
A slump of that to 150 may convince China to intervene in the currency market to protect its own flagging economy and it would be perfectly rational for it to do so, former Chief currency economist at Goldman Sachs Jim O’Neill said:
‘If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,’ ‘China would not want this devaluing of currencies to threaten their economy.’”
- USD/CNY is the onshore yuan and is permitted to trade plus or minus 2% from the daily reference rate.
- CNH is the offshore yuan. USD/CNH has no restrictions on its trading range.
- A significantly stronger or weaker rate than expected is typically considered a signal from the PBOC.
- The IMF lifted the yuan’s weighting in its Special Drawing Rights currency basket in May
China Deals in Yuan with Russia and Others
“China has dramatically increased use of the yuan to buy Russian commodities over the past year, with nearly all of its purchases of oil, coal and some metals from its neighbour now settled in the Chinese currency instead of dollars… The switch to yuan to pay for much of a roughly $88 billion commodities trade in the wake of the Ukraine war accelerates China’s efforts to internationalise its currency, at the expense of the dollar, although strict capital controls are expected to limit its global role in the near term. In March, the yuan – also known as the renminbi – became the most widely-used currency for cross-border transactions in China, overtaking the dollar for the first time…”May 11 – Reuters (Chen Aizhu)
China has been moving to protect itself since the US weaponized the US dollar to impose financial sanctions on Russia after its invasion of Ukraine so as to decrease it’s own vulnerability to similar sanctions. China has struck trade agreements to use its currency directly in trade deals.
Since the invasion of Ukraine and their seizure of about half of Russia’s $US640 billions of dollar-denominated foreign exchange reserves, China and Russia have been conducting most, about two-thirds of their significantly increased trade in their own currencies. The yuan is now the most traded currency in Russia and Russia also now holds about a third of the world’s yuan-denominated foreign exchange reserves.
China did a deal with Saudi Arabia to pay for oil purchases in yuan, the first time in nearly half a century that the Saudis have been prepared to accept anything but the dollar in exchange for their oil. China is seeking similar deals with other Middle Eastern oil producers. China’s China National Offshore Oil Company and France’s TotalEnergies struck the first deal for a LNG cargo denominated in yuan.
China and Brazil announced they would use their own currencies to settle trade and that Brazil would connect to China’s fledgling international payment system. The system is its alternative to the US-dominated SWIFT international payments and messaging system.
India is also trying to do more direct deals that reduce its exposure to the dollar. In Latin America and South-East Asia, countries are also trying to circumvent the use of the dollar by doing more deals in their own currencies. China and Russia are talking about the creation of a “BRICs” (Brazil, Russia, China and India) reserve currency, perhaps backed by a basket of commodities.
While with the increase of Chine trade in particular the dollar in global trade and financial transactions has waned, it is not likely that the end of dollar dominance will occur soon. Simply, the US runs large trade deficits and therefore creates more dollars than its domestic economy requires, it has very deep and liquid markets to absorb the savings of those countries with big trade surpluses, the dollar floats freely with very limited capital controls and it has a legal system that the rest of the world generally trusts. Yes, all these factors are under siege much of it by Russian and Chinese propaganda and their lapdogs like Iran.
China has none of these things and is most unlikely to change its communist economic model to run large trade deficits to absorb the rest of the world’s savings, or completely liberalize its financial markets. Just this week we saw the HKMA (essentially part of China) battle to protect its USDHKD band. We don’t see them abandoning its managed exchange rate policy or its capital controls let alone create a transparent and trusted judicial system.
The fact the dollar’s share of global foreign exchange has fallen from about 72 per cent at the turn of the century to about 59 per cent, China’s currency accounts for just under 3 per cent of those reserves. Only about 2 per cent of global trade is conducted in yuan/renminbi against more than 40 per cent for the dollar. The BIS shows the dollar dominates global foreign exchange transactions with a share of almost 90 per cent and about two-thirds of all global securities issuance is in dollars.
Each financial crisis we hear of gold, and now crypto replacing the dollar. The cold reality is that there is no conventional alternative to the dollar as the world’s reserve currency. Scandals like FTX, collapses of Silicon Investment and Signature Bank, and multiple Crypto exchange frauds undermine Crypto markets. China may have ambitions to chip away at that dominance as it buys up gold and does these trade deals. It would take a revolution for the Communist Party to give up the tight control of its financial system.
Yes, the dollar’s dominance benefits the US financial sector and enables the US government and American entities such as GSEs or major corporations to borrow more cheaply than it might otherwise be able to do. Significantly it makes US non-financial businesses less competitive and has eradicated out traditional jobs as they have shifted to developing economies such as China and India. The reserve status is an increasingly exorbitant burden because of the cost of running persistent large trade deficits. The reality the US is at this time the only economy and financial system that could absorb such a large share of the world’s trade surpluses.
There is also the reality of the war with Russia has broadening to us versus them and China is on the them team. Iran for example is on that team as is North Korea, hardly bastions of freedom and security. The attitude is much along the lines of let them all trade together. China’s biggest trading partners are the US, Japan and Australia, so there is that fact that the anti US camp tends to try and gloss over.
Way down the line as various trading blocs develop in their own currencies or international digital currencies, backed by gold and other assets with low volatility, might emerge. That is the dream for many. At this time, we are a long way from a genuine alternative, clearly China d Russia, Saudi Arabia and Iran all like to gloss over Russia’s invasion of Ukraine, the rest of the world does not. Russia likes the drama, fear and trauma of destructive reconstruction of global economy and trade. Does China really want that?
China Buying Gold
China added to its gold reserves for a sixth straight month in April, extending a flurry of purchases as central banks around the world expand their holdings of bullion amid escalating geopolitical and economic risks Singapore, China and Turkey among the biggest buyers.
China raised its gold holdings by about 8.09 tons in April, according to data from the State Administration of Foreign Exchange on Sunday. Total stockpiles now sit at about 2,076 tons, after the nation increased reserves by about 120 tons in the five months through March.
China’s recent buying spree began in November and is the first since a 10-month run that ended in September 2019. Prior to that, the last wave of inflows ended in late-2016.
China’s end-April foreign currency reserves rose to $3.2048 trillion, up by $20.9 billion from the month before, the data showed. Rise in the foreign-exchange reserves was a result of US dollar depreciation and rise in global financial asset prices, the foreign-exchange regulator said in a statement.
China Tougher Stance on Capital Flows
“China’s yuan jumped on Friday after the country’s central bank moved to shore up the currency following a recent selloff, vowing to curb speculation and calling for more stability in the foreign exchange market. The People’s Bank of China and the foreign exchange regulator will ‘strengthen market expectation guidance and take actions to correct pro-cyclical and one-way market behaviors when necessary.’ The offshore yuan… pulled away from 7.0750, its weakest level since December.”May 19 – Bloomberg
“China is taking a tougher stance on capital flows out of the country as the nation’s two leading cross-border online brokerages decided to remove their trading platforms from app stores in the mainland… China has increased scrutiny of operations that could risk financial stability and national security in recent months, especially as relations with the US worsened and demand rose among mainlanders to move wealth offshore as China reopened from Covid zero. Lines at Hong Kong bank branches had hours-long waiting times in early May during the Golden Week holiday, as tourists from the mainland tried to open an account in the region.”May 16 – Bloomberg
“China’s yuan gains for the first time this week after nearing the 7.1-per-dollar level earlier Friday. A few big Chinese state-owned banks actively sold large amounts of dollars in the onshore yuan spot market, according to several traders. At times when dollar-buying demand increased, the big banks met those bids and sold dollars, supporting the yuan, traders said; that in turn triggered selling from dollar bulls.”May 26 – Bloomberg
“Goldman Sachs… expects more gloom for the Chinese currency despite efforts from policymakers to shore up sentiment. The US bank has slashed its projection for the onshore yuan, targeting a move to 7.1 against the dollar in the next three months… ‘Significant weakness in China data and renewed dollar strengthening on the back of progress in US debt-ceiling negotiations’ have weighed on the currency, wrote China economist Hui Shan. The onshore yuan traded 0.1% weaker Monday at 7.0241. The Chinese currency fell past the key 7-per-dollar threshold last week, the first time since December.”May 21 – Bloomberg (Tania Chen)
USDCNH Technical Analysis
Last year USDCNH spat +2/8, to test the April Highs and recalculated. China’s renminbi had hit its weakest level against the dollar since 2007 as concerns over President Xi Jinping’s appointment of a harder line leadership team and a struggling economy spread from equities to currency markets.
It caught the impulse power of USDJPY and followed through since on the correction. Resistance is MM levels and the Kijun and 4/8 for now. Support the previous high/low as marked and 0/8.
China’s Yuan, Japanese Yen, the British Pound and the Euro have seen significant moves given their geopolitical dynamics.
“China’s yuan finished the domestic session at a two-week high against the dollar on Friday, but still looked set for the worst annual performance in 28 years. The onshore yuan finished the domestic trading session at 6.9514 per dollar, the strongest such close since Dec. 14. If it finishes the late night session at the domestic closing level, it would have lose 8.6% against the dollar for the year…”December 30 – Reuters (Winni Zhou and Brenda Goh)
During July the PBOC cut the 5-year loan prime rate to 4.45% from 4.6% to boost the economy and cut short term rates further this past week. Beijing warned against criticism of its dynamic zero-COVID policy. The zero-tolerance approach, which depends on strictest lockdowns and mass testing, weighed heavily on the already slowing economy and raised the need for further policy easing. Protests and further implosion of the Chinese economy led to the Chinese reversing the zero Covid policy. A monumental failure to Xi.
Looking Back at the Yuan Fall and PBoC Response
On Aug. 19, the central bank also signaled its preference for a weaker yuan by setting its daily midpoint fix for onshore trading at more than 6.80 against the dollar. This was the first time it had crossed that level in 23 months. The PBOC allows the currency to trade within a daily range of 2% up or down against the dollar from its target level. The market is asking where the upper band is now?
“China’s central bank stepped up its defense of the falling yuan with a strongly-worded statement to warn against speculation, after the currency dropped to its lowest versus the dollar since 2008. ‘Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term,’ the People’s Bank of China said… Key market participants need to ‘voluntarily safeguard the stability of the market and be firm when they need to iron out big rallies or declines in the exchange rate.’ The central bank added that it has ‘plenty of experience’ to fend off external shocks and effectively guide market expectations.” September 28 – Bloomberg
The forward margin between the Yuan and the USD has widened as the PBoC’s rate cuts have been made it less attractive to hold the yuan against the dollar because the U.S. Federal Reserve has gone in the opposite direction.
April 28 – Bloomberg (Sofia Horta e Costa and Tania Chen): “When China’s tightly managed currency depreciates dramatically against the dollar, it can be hard to stop. More than six years after China’s shock 2015 devaluation roiled global markets and spurred an estimated $1 trillion in capital flight, the yuan is weakening at a similar pace. Onshore it’s lost nearly 4% in eight days, while the offshore rate is heading for its worst month relative to the greenback in history. Selling momentum is the strongest since the height of Donald Trump’s trade war in 2018.”
China Foreign Exchange Trading System
While the yuan has tumbled about 8% versus the USD this year, it has strengthened against the currencies of major China’s export rivals such as Japan and South Korea. The yuan’s trade-weighted basket is just about where it was at the end of December.
The Fed’s tightening cycle has triggered a widespread selloff in Asian currencies this year, including more than 10% declines for the Japanese yen and the Korean won. China’s central bank last let the yuan depreciate past 7 to the dollar in August 2019, during the trade war between Beijing and Washington.
The yuan however has held up better against other currencies this year. China Foreign Exchange Trading System, an arm of the central bank, measures the performance of the currency against a basket of 24 currencies, including the dollar, yen and euro and lesser-traded currencies such as Polish zloty and Russian ruble the WSJ reported. That yuan index was roughly at the same level it was at the start of 2022, according to the most recent data published on Aug. 19.
Australian Dollar – AUDUSD
The Aussie dollar had been rallying with optimism about China’s economy reopening & the prospect of a higher RBA cash rate, which it got. The Australian dollar however has been a relative under-performer among the majors in the past three months. Australian terms of trade have deteriorated rapidly in recent months. Coal prices have steadied after halving in price since the start of the year, iron ore prices have sold off with weak Chinese demand, weighing on AUD sentiment. With pullbacks in commodities and a rise in US rates we have seen the AUD reverse off the July and cloud top confluence at Northern sphere of influence.
To reflect potential upside, we look at the way down AUDUSD with cloud, Kijun and channel confluence over $0.7200 with 5/8 and previous 38% now the pivotal resistance. Note the reversal at the top of the channel. Since completing a 5 at the psychological 80 level it had fallen & corrected under the weekly cloud in emotive fashion. Overcoming the $0.6575-$0.6600 then 68/69 areas lifted the tone prior to the recent relative weakness.
Support is the Murrey Math Levels. It was the strongest major currency against the USD last July after the Yen correction so keep an eye on the basket should a bounce come into effect.
New Zealand Dollar – NZDUSD
The Kiwi reversed off the 61.8% level after it bounced off its sphere of influence at -1/8, a two year low with the dollar soaring. With the dollar weakening, the kiwi rallied. Strength is also came from the NZD/JPY testing highs, with 2015 levels at 94.00 in sight on a break (it closed 87.67). The point is yields, China reopening and a weak yen. On the way down it outran the Aussie lower after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there.
The New Zealand dollar has under-performed among the majors in the past three months with terms of trade deteriorating. Looking back last year NZDUSD broke the yearly low (0.6061) after failing to test the June high (0.6576) the flood gates opened. The Kiwi has recovered beyond those levels quickly testing the negative slope breaking the string of failed attempts to push through Kijun resistance.
Canadian Dollar – USDCAD
USDCAD bounced off the Kijun to above the tenkan off the 50%. The shift in the Canadian/US rate curve impacts the shifts. The psychological level at the 61.6 fib at 1.3659 at 4/8 confluence is like a magnet. Loonie weakness amplified by the weakness in crude oil prices. The CAD has weakened against the AUD and NZD. Watch flat Kijun and Tenkan feed the energy. Use Fibs for support and resistance. Eyes are on the recent decline in energy prices.
The Canadian dollar has not been able to rally significantly against the USD, that said, nor has it weakened, the 1.35 level being a magnet. Bank of Canada’s (BoC) policymakers have been keen to push back against the market pricing in interest rate cuts at the end of the year. Following the April policy decision, Governor Macklem expressly stated that a rate cut by year-end was not the most likely scenario.
Emerging Market Currencies
Last year we saw seen a run-on EM market which unleashed a dangerous dynamic. We have seen EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” Nomura has warned 22 of the 32 countries covered by its in-house “Damocles” warning system have seen their risk rise since its last update since May to the most vulnerable since July 1999 and near the peak at “the height of the Asian crisis”. Seven countries, Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary are now at a high risk of currency crises.
When global liquidity flows abundantly, financial flows originating from U.S. trade deficits and leveraged speculation often find their way into higher-yielding EM securities. These flows end up at EM central banks, where they are conveniently “recycled” back into U.S. markets through (chiefly) purchases of Treasuries, agencies and other debt securities.
“Some of the world’s poorest economies embraced borrowing in their own currencies as a shield from painful swings in the U.S. dollar. Now that strategy may be coming back to bite. Debt issued by emerging-market governments and companies in their local currency reached $12.5 trillion in 2021, according to… Bank of America that excludes China’s enormous borrowings in the yuan. That compares with $4 trillion in foreign-currency debt. The fate of local-currency debt has become a key stumbling block in debt-restructuring negotiations in Ghana, Sri Lanka and Zambia. And it is forcing investors, policy makers and economists to rethink what an emerging-market debt crisis looks like.”December 4 – Wall Street Journal (Chelsey Dulaney)
EM tightening cycle fragility (aka “taper tantrum”) is not a new phenomenon. This is, however, the first episode of highly levered (securities markets and real economies) EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” With the global liquidity backstop now nebulous, there is every reason for the leveraged speculators to move more aggressively in exiting levered EM “carry trades.” And resulting outflows lead to only weaker currencies, more EM central bank Treasury (and sovereign debt) sales, and greater stress on global financial stability.
Mexican Peso USDMXN
The USDMXN break of its triple bottom saw Peso gains accelerate after breaking from the sphere of influence and spitting the tenkan. The big move on US rates down and the Mexican central Bank raising more than expected helped it penetrate the long sideways pattern and consolidation despite outside uncertainty from oil and high rates. Use the Gann octave and the extension fibs to help measure the noise.
The Mexican peso remains the best-performing major currency against the USD so far in 2023, with an 8.3% gain. The peso has been aggressive Banxico rate hikes that have striven to fight domestic inflation and maintain a significant yield advantage over the USD as Fed policy has tightened. High yields and relatively low volatility are making the MXN an attractive carry trade vehicle for investors.
Caution there with slowing inflationary pressures suggesting the central bank’s aggressive tightening cycle may be close to an end.
Turkish Lire USDTRY
Nothing new here, the Turkish Lira decline continues after another Central Bank Meeting and heading into the runoff for the Turkish Presidential elections with Erdogan ahead, the Lira hit another all-time low. USDTRY after spitting 17 against the dollar has been one way. USDTRY barely took strength from other emerging markets big reversals. Since we broke the all-time Lira low of 18.4 hit in December it has stepped headed towards +1/8 over 20. Turkey’s recent monetary policy decisions have not been based on economic fundamentals, since late 2021 seeing a cumulative 850bps cut in rates in a matter of months to current levels.
To recap the wild 18-10 USDTRY swing last year reversed after falling in 3 waves to explode over the Tenkan, weekly cloud Kijun and 50wma below. The Murrey Math and Fib targets with last year’s Lire all-time lows in a hyper inflating collapse. So far this year the lira is the worst performer in emerging markets, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year.
The background is the same with President Recep Tayyip Erdoğan vowing to cut interest rates despite spiraling inflation. In December last year, the Turkish Central Bank introduced a “Lira deposit scheme” to stem the decline in the currency. The Turkish president said that the country had ‘wasted years’ with the misguided view that prices should be controlled by using higher borrowing costs to suppress consumption. Such policies, he said, benefited only ‘those living a charmed existence and filling their pockets with [the proceeds of] high interest’, including foreign investors.”
Central Bank Rate Watch:
The Federal Reserve’s next move is overhanging global financial markets, June FOMC is still ‘live’. Ahead of that we sees The BoC, RBA, RBI, CBR and BCRP decisions. The FOMC has gone into communications blackout ahead of the June 14th decision. We look towards the most recent data and mutterings. Friday’s US jobs report confused many with strong jobs growth but at the same time lower earnings and unemployment. Earlier in the week Cleveland Fed President Mester (not an FOMC voter) said that she sees no compelling reason to pause the rate hikes in June.
For a Complete Central Bank Overview Visit TC Central Bank Watch:
For a Complete Macro and Micro Market Overview Visit TC Traders Market Weekly
From The TradersCommunity Research Desk