Article / 28 February 2014 at 8:36 GMT

USD tilting weaker again despite record USDCNY rally

Head of FX Strategy / Saxo Bank

• CNY dives to nadir of 6.18 against USD
Key Chinese data over weekend to follow
• Euro thus far brushes aside worsening situation in Ukraine

By John J Hardy

The biggest news overnight was the massive fresh weakening of the Chinese mainland currency, which traded as weakly as 6.18 versus the USD before strengthening a bit coming into this morning. The move was the most significant weakening in the currency since China began managing the currency stronger in 2005. At this point, one has to question whether some of the move is now being generated by market participants hedging their USD/CNY carry trade risks rather than coming fully from an official effort to manage the rate higher. Yesterday, Zero Hedge passed along some interesting Morgan Stanley research that discusses the use of popular derivatives strategies employed to take advantage of the former CNY strengthening regime (so called target redemption forwards, or TRFs) and attempts to quantify the risk of losses as USDCNY rate trades higher. Apparently, the pain threshold starts to rise significantly around a level of 6.25.


Night falls over Shanghai as China's government tries to manage a weakening of the CNY. Photo: Vincent_St_Thomas \ Thinkstock

The US dollar is not hanging on to its recent gains and softened again almost across the board after yesterday’s rather strong durable goods orders numbers and a slightly disappointing weekly jobless claims number. Janet Yellen’s testimony before the Senate certainly saw no new surprises and the forward rates curve remains pegged close to the lowest expected US Federal Reserve policy rates for the cycle. She did mention that weather has played a role in softer data, but expressed uncertainty on the degree of the weather effect.

Japan’s data releases overnight were generally encouraging, particularly the industrial production data, and may be one of the drivers behind USDJPY dipping back lower.

The situation in Ukraine is extremely serious, but it is interesting that this is not at all rubbing off on the euro currency. Still, I would remain highly tuned in to this event, as it could have euro repercussions if the confrontation escalates. A MISH post suggests that the Western media is entirely missing the mark in what is actually going on and the situation may be more dangerous than previously thought.

Looking ahead

Interesting data points for the Scandies out this morning with Swedish GDP and Norway’s latest employment and retail sales data. I’m watching for a further rally in EURSEK as Swedish two-year rates are setting record modern era lows and wonder if the NOK rally has gotten short-term overdone as well. Note that EURNOK is waffling a bit after trying to set new lows yesterday, but we’ll need the data to get short-term direction here. Also note that NOKSEK is bumping up against the 200-day moving average soon and may be overdone short term.

Later, we have the latest Eurozone CPI estimate, with a slightly higher-than-expected reading perhaps encouraging EURUSD to test higher still now that we got such a strong bounce yesterday. It certainly appears that we will close the week on a weak note for the US currency as we head into next week’s string of key data, including the major ISM’s and employment report. If the European Central Bank once again flips and flops and offers nothing new on the policy front, we may be on the path toward 1.40 in EURUSD before the pair can find reasonable resistance. Let’s see if we get a close above 1.3800 first, however.

A classic reversal pattern yesterday after the pair hit new local lows. There are still a few shreds of local resistance here around 1.3725. If that is taken out, the next focus will be on whether the pair can sustain a close above the 1.3775 recent highs ahead of the ECB meeting, or if we continue to waffle back and forth in the range until then. The pair needs to move well below 1.3700 here intraday to give bears any near term hope.

Source: Saxo Bank

In early North American hours, watch for the Canadian GDP data and the US GDP Revision, which is expected to see a significant revision lower to the initial Q4 growth estimate of plus 3.2 percent annualised. Finally, we have the last of the major US manufacturing surveys (Chicago PMI) ahead of next week’s ISM manufacturing survey.

Note the key Chinese manufacturing and services surveys coming up over the weekend and in early Asian hours on Monday. After today’s blow-up in the CNY rate, I would suspect the rate is massaged sideways for a while from here.

Economic data highlights

  • New Zealand Jan. Building Permits out at -8.3% MoM vs. -3.5% expected
  • Japan Feb. Markit/JMMA Manufacturing PMI out at 55.5 vs. 56.6 in Jan.
  • Japan Jan. Overall Household Spending rose +1.1% YoY vs. +0.5% expected and vs. +0.7% in Dec.
  • Japan Jan. Jobless Rate steady at 3.7% as expected
  • Japan Jan. National CPI out at +1.4% YoY vs. +1.3% expected and vs. +1.6% in Dec.
  • Japan Jan. National CPI ex Food and Energy rose +0.7% YoY as expected and vs. +0.7% in Dec.
  • Japan Feb. Tokyo CPI ex Food and Energy rose +0.5% YoY vs. +0.4% expected and +0.3% in Jan.
  • Japan Jan. Industrial Production out at +4.0% MoM and +10.6% YoY vs. +2.8%/+9.4% expected, respectively and vs. +7.1% YoY in Dec.
  • Japan Jan. Retail Sales out at +1.4% MoM vs. +1.3% expected
  • New Zealand Feb. ANZ Activity Outlook out at 58.5 vs. 53.5 in Jan.
  • New Zealand Feb. ANZ Business Confidence out at 70.8 vs. 64.1 in Jan.
  • UK Feb. GfK Consuer Confidence out unchanged at -7 as expected

Upcoming Economic Calendar Highlights (all times GMT)

  • Spain Feb. CPI (0800)
  • Sweden Q4 GDP (0830)
  • Sweden Jan. PPI (0830)
  • Norway Feb. Unemployment Rates (0900)
  • Norway Jan. Retail Sales (0900)
  • Italy Jan. Unemployment Rate (0900)
  • Eurozone Jan. Unemployment Rate (1000)
  • Eurozone Feb. CPI Estimate/CPI Core (1000)
  • US Fed’s Fisher to Speak (1000)
  • Canada Dec. GDP (1330)
  • US Q4 GDP revision (1330)
  • US Feb. Chicago PMI (1445)
  • US Feb. Final University of Michigan Confidence survey (1455)
  • US Jan. Pending Home Sales (1500)
  • Eurozone ECB’s Lautenschlaeger to Speak (1500)
  • US Fed’s Stein, Kocherlakota, Evans and Plosser Speaking on panel (1515)
  • UK BoE Governor Carney to Speak in Frankfurt (1530)
  • China Feb. Manufacturing PMI (Sat 0100)
  • Australia Feb. AiG Performance of Manufacturing Index (Sun 2230)
  • Australia Feb. RPData/Rismark House Price Index (2300)
  • Australia Jan. HIA New Home Sales (0000)
  • China Feb. Non-manufacturing PMI (0100)
  • China Feb. HSBC/Markit Manufacturing PMI (0145)

John J Hardy is Head of FX Strategy for Saxo Bank. Read more of John's FX commentary on our social trading site here.




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