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US Dollar Eyes Rising China Tension as Jobless Claims Mount

US Dollar Eyes Rising China Tension as Jobless Claims Mount

Rich Dvorak, Analyst

US DOLLAR FINDS SUPPORT, ESCALATING TENSION OVER HONG KONG AUTONOMY COULD CATALYZE BREAKDOWN IN CHINA TRADE DEAL

  • US Dollar kept afloat as Secretary of State Mike Pompeo escalates China tension by declaring Hong Kong no longer autonomous from Beijing
  • DXY Index clings onto technical support near the 99.00 price level ahead of another staggering spike in jobless claims data expected Thursday
  • USD outlook still clouded amid unwavering risk appetite, rising US-China trade uncertainty and lingering coronavirus recession risk

The US Dollar gained ground on Wednesday and showed strength against its pro-risk AUD peer in particular. US Dollar found support as tension with China escalated further after Secretary of State Mike Pompeo testified to congress that Hong Kong is no longer independent from Beijing. According to the latest statement from Pompeo, China’s security law looks to “fundamentally undermine Hong Kong’s autonomy and freedoms.” This also follows the recently-passed Senate oversight bill and increasingly hawkish rhetoric from the White House as Trump talks tariffs.

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Traders steered safe-haven currencies higher in response to the developments seeing that this could jeopardize Hong Kong’s special trade status with the United States and perhaps undermine the phase one US-China trade deal. China trade friction heating up with Australia – its largest trading partner as highlighted in this analysis by Dimitri Zabelin – likely contributed to the plunge in spot AUD/USD price action as well.

AUD/USD BEARISH
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Change in Longs Shorts OI
Daily 16% -26% -11%
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US DOLLAR PRICE CHART – DXY INDEX & SPOT USD/CNH OVERLAID: DAILY TIME FRAME (MARCH 2018 TO MAY 2020)

US Dollar DXY Index Price Chart China Tension USD to  Chinese Yuan

Chart created by @RichDvorakFX with TradingView

Likewise, the US Dollar climbed considerably against the Chinese Yuan with Sino-American relations deteriorating once more. In fact, spot USD/CNH just spiked to its highest reading since September 2019 amid peak trade war uncertainty.

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The broader US Dollar and DXY Index could stay relatively supported, and perhaps jump back higher, considering China tension remains a major threat to global GDP growth and market sentiment. That said, the US Dollar might continue to face headwinds as seemingly relentless risk appetite crushes volatility and inflates major stock market benchmarks, such as the Nasdaq or S&P 500, within reach of all-time highs.

UNEMPLOYMENT STILL SKYROCKETING ALBEIT A SLOWER PACE

US Dollar Price Chart Jobless Claims Historical Data Coronavirus Recession

Looking at hard economic data, however, it seems hard to believe that things are nearly back to normal since the coronavirus lockdown first paralyzed business activity and imploded nonfarm payrolls. On one hand, coronavirus vaccine hope and relatively less-horrendous economic data prints provide reason for optimism. Conversely, it is difficult to swallow the catastrophic NFP report and unprecedented number of people unemployed by the coronavirus recession.

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Initial jobless claims, though rising at a slower pace, have notched readings above two million for the last nine consecutive weeks and averaged over four million each week since the beginning of March. At the same time, the most recent reading for continuing claims crossed the wires at more than 25 million unemployed.

That said, along with China tension, upcoming weekly jobless claims data, due May 28 at 12:30 GMT has potential to weigh on risk appetite and US Dollar demand, possibly more than backward-looking GDP data.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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