Instead of geopolitical risks, Monday’s FX session was dominated by the very strong March US retail sales numbers. Consumption was meant to be the weak link in the US economy, but the lack of slowdown in this segment very much supports the view that the Federal Reserve is in no rush to cut rates. US two-year Treasury yields pushed back close to 5.00% and the dollar extended recent gains.
The broadly stronger dollar is now having some ramifications for Asian currencies. Many high-yielding or high-profile currencies such as the Indonesian rupiah and Korean won are falling sharply – alongside the Japanese yen. The fact that China has been keeping the renminbi stable has meant that the trade-weighted renminbi has surged about 1.3% (quite a big move) over the last week. On investors’ minds is the question of whether the People’s Bank of China (PBoC) will now allow more flexibility into the renminbi – a not unwelcome development given very low Chinese inflation and weak export growth. That is why investors are hyper-sensitive to the PBoC’s daily USD/CNY fixing.
Back on 22 March, the PBoC experimented with a fixing above 7.10 – which resulted in heavy losses for both the onshore and offshore renminbi. Subsequent fixes were made sub 7.10, but last night the PBoC fixed USD/CNY at 7.1028 – suggesting it was acceding to market pressure to allow the renminbi to weaken. The prospect of the PBoC allowing a weaker renminbi is a bullish one for USD/Asia and for the dollar in general. The highest correlations with the CNH in the G10 space are the Australian and New Zealand dollars. In the EM space, apart from the directly managed Singapore dollar, the South African rand has the highest correlation with the CNH.
In short, should the PBoC start to allow a higher series of USD/CNY fixings – acceding to market pressure – it could prove a boost to the dollar around the world.
Today’s US calendar is quite light – just housing starts and industrial production. There are also a few Fed speakers, including Chair Jay Powell participating in a moderated Q&A with Bank of Canada Governor Tiff Macklem. This takes place at 1915CET. The only downside risk to the dollar we see today is from Canadian CPI. Should a soft March Canadian CPI firm up views of a June BoC rate cut, it could drag US yields and the dollar slightly lower intra-day.
It is very hard to fight the dollar bull trend right now and DXY may find support at 106.00 ahead of a trend towards 107.
Chris Turner
