Chart of the day: USDCNH
The offshore yuan (USDCNH) weakened 2% or 1430 pips to 7.1554 in just three trading days since 17 March.
The recent CNH depreciation was largely due to the unstoppable rally of the US dollar, which advanced strongly against all major and EM currencies in the last five days.
It's true that the US dollar is a safe-haven currency, which should outperform during uncertainty or global sell-off. However, the fact that JPY, CHF, and even gold have all been smashed recently suggests some other reason behind the USD strength.
During the global sell-off that brought main equity markets around the world into bearish territory, investors sold everything except USD. Large funds have rushed to buy USD, while, at the same time, USD funding has boosted the appeal of the USD with the cross-currency basis (USD funding cost) widening. That’s why the Fed came out and enhanced the existing dollar-liquidity swaps it offers foreign central banks.
Although the disappointing initial jobless claims for last week (281k against 219k exp) shows the labor market might experience a difficult time moving forward, the USD appreciation was less related to the domestic economy at the current stage.
The PBOC didn’t join its global peers in the past few weeks to slash the rate, keeping the interest rate of one-year medium-term loan facility (MLF) on hold at 3.15%.
The one-year and five-year benchmark loan rate announced Friday morning remained unchanged at 4.05% and 4.75%. Markets estimated at least a 5 bps cut.
The inaction shows PBOC’s policy stance and confidence on existing stimulus measures despite recent worse-than-expected data (industrial output -13.5%, retail sales -20.5%, fixed-asset investment -24.5%, unemployment rate 6.2%). The yuan find some support in the Asian session.
USDCNH has retreated from a five-month high to 7.1031, with the RSI index moving away from the overbought territory.
Until the extremely high volatility subsides and the incredible demand on the US dollar fades away, USDCNH is skewed to the upside. The pair needs to close above 7.1680 (resistance level in red line) to open the door towards 7.1957, the 2019 high. On the flip side, 5 EMA offers the immediate support, followed by 7.03 near the descending trendline, which acted as a long-term resistance level since September 2019.
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