USD/CNH has been sent back to a low of 7.1659 on Friday, travelling from a monthly high printed yesterday and a touch below there today at 7.1770 as EUR/USD squeezes out the week shorts.
There is a focus on DXY weakness and the euro's strength for which leads some to believe USD/CNH is destined lower. European equities closed higher on Thursday and the EUR/USD rose from 1.1000 to 1.1092 – a two-month high. The EC economic sentiment gauge also improved slightly in May to 67.5 (prev: 64.9) as lockdown restrictions are gradually eased. The improvement in industry confidence, which was led by improved production expectations, is supporting risk-on sentiment.
This, in turn, is turning the screw in the US dollar's cage, enabling all boats to rise. However, with manufacturers remaining pessimistic about demand and sentiment in the services sector deteriorating further, as well as signs that COVID-19 is lurking around European street corners, upside potential for the euro is limited, fundamentally.
Meanwhile, bearish factors for the US dollar are creeping in from the US economy which US stocks continue to defy gravity (safe haven USD bearish). US weekly jobless claims rose in line with expectations at 2.1 million. "However, continuing claims fell to 21m from 25m (estimates were close to 26m), indicating the worst in the labour market may have passed," analysts at Westpac explained. In other data, the analysts noted that April durable goods orders did not fall as much as expected, the headline measure down 17.2%m/m (vs est. -19.0%m/m), and the ex-transport measure down 7.4%m/m (vs est. -15%m/m). "The second take on Q1 GDP was slightly weaker (annualised -5.0%, vs est. -4.8%), although personal consumption fell 6.8% annualised (vs the expected -7.5%). Pending home sales fell 21.8%m/m in April (vs est. -17%m/m)."
China could be weaponising its currency
Besides economic data and central banks, geopolitics is coming back to the fore, fast and has the gleaming potential to send USD/CNH higher. In the final hour of trade on Wall Street, the US President Donald Trump announced that he will hold a news conference on China today. This conference is more than likely to include the president's opinions on a number of major risk-off themes, but most critically, the US administration's political response to China’s parliament approving a decision to go forward with national security legislation for Hong Kong.
This was a move that has triggered widespread concern about democratic freedoms and is highly controversial. The US administration has already announced that it has cancelled visas for Chinese students with ties to military schools and has stripped Hong Kong of its special treaty status, certifying it as no longer autonomous.
This opens the way for the Trump Administration to revoke special arrangements on trade. Market implications are significant. We have already seen the value of the CNY weaken vs. the USD which will likely raise concerns that China could be weaponising its currency to support external trade.
For key notes on the matter, see below:
- US Pres. Trump to hold China news conference on Friday, risk-off themes will be in play
- China's plan of national security law in Hong Kong puts Trump in an unwelcome spot with Xi
- The Hong Kong Dollar, the next black swan?
- Chart of the Week analysis
- How do experts view financial conflict of top two economies? – The Global Times
In such an environment, the USD could well disappoint those positioning their bets for a significantly weaker US dollar. Throughout the trade wars in 2018, the DXY and USD/CNH both climbed almost 11% and the euro fell by the same margin.
USD/CNH levels
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD fluctuates near 1.0700 after US data
EUR/USD stays in a consolidation phase at around 1.0700 in the American session on Wednesday. The data from the US showed a strong increase in Durable Goods Orders, supporting the USD and making it difficult for the pair to gain traction.
USD/JPY refreshes 34-year high, attacks 155.00 as intervention risks loom
USD/JPY is renewing a multi-decade high, closing in on 155.00. Traders turn cautious on heightened risks of Japan's FX intervention. Broad US Dollar rebound aids the upside in the major. US Durable Goods data are next on tap.
Gold keeps consolidating ahead of US first-tier figures
Gold finds it difficult to stage a rebound midweek following Monday's sharp decline but manages to hold above $2,300. The benchmark 10-year US Treasury bond yield stays in the green above 4.6% after US data, not allowing the pair to turn north.
Worldcoin looks set for comeback despite Nvidia’s 22% crash Premium
Worldcoin price is in a better position than last week's and shows signs of a potential comeback. This development occurs amid the sharp decline in the valuation of the popular GPU manufacturer Nvidia.
Three fundamentals for the week: US GDP, BoJ and the Fed's favorite inflation gauge stand out Premium
While it is hard to predict when geopolitical news erupts, the level of tension is lower – allowing for key data to have its say. This week's US figures are set to shape the Federal Reserve's decision next week – and the Bank of Japan may struggle to halt the Yen's deterioration.