As USD/CNH Surge Continues, US Dollar Suffers Elsewhere
- USDCNH (offshore) advances over +2% overnight after yesterday's +1.8% gain.
- See the August forex seasonality report.
If USDCNH's surge continues, diversification flows may work against the US Dollar. Why? USDCNH has been effectively pegged around ¥6.1000 and ¥6.3000 for the past year. Concurrently, with EURUSD plummeting from near $1.4000 in May 2014 to below $1.0500 in March 2015, it effectively dragged EURCNH lower as well: the pair dropped from above ¥8.7000 in May 2014 to just above ¥6.5000 in March 2015. EURCNH's and EURUSD's performances have essentially mirrored one another due the relative stability of USDCNY over the same period.
While the PBOC's efforts have impacted the entire CNH-complex, USDCNH has been front and center to the move. With the abc/CNH pairs surging, in order for the EURCNH and EURUSD relationship to remain intact, it effectively means that EURUSD needs to track EURCNH higher. Traders and investors holding long USDCNH positions have now seen those positions swell to represent a greater portion of their overall holdings, and are likewise incentivized to shift into other short CNH positions (long EURCNH, short CNHJPY, etc) in order to reduce net-long USD exposure in their portfolios (especially if the goal is for an equal-weighted basket of DM currencies versus the CNH, for example).
--- Written by Christopher Vecchio, Currency Strategist
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