USD/CNH struggles to hold near to 7.20, bearish bets of weaker dollar play out

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. 

• COVID-19 update: Second wave alert, markets on standby

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