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Talking Points – USD/CNH, FOREIGN RESERVES, PBOC, FED, TRADE WARS

  • USD/CNH gapped higher following decline in September’s Chinese foreign reserves
  • PBOC takes action to stem Yuan selling, USD/CNH prices may consolidate after rally
  • Emerging markets’ volatility, trade wars may cause Yuan to further weaken

Read up on the current economic conflict with A Brief History of Trade Wars.

The US Dollar strengthened against the offshore Chinese Yuan, gapping higher ahead of Monday’s Asia Pacific trading session as local economic data crossed the wires. September’s foreign reserves clocked in at $3087.03b, down from both economists’ forecasts of $3105.00b and $3109.72b. The decline in foreign financial assets may indicate negative effects of US and China’s reciprocal tariffs, as the People’s Bank of China could dip into FX reserves to prop up the Yuan. The central bank also cut the required reserve ratio for local banks in an attempt to help onshore equities.

USD/CNH 5-Minute Chart

USD/CNH Gaps Higher After Foreign Reserves Data, Trade Wars Woes

USD/CNH’s gap higher continues its upside momentum occurring for the majority of this year. An increasingly hawkish Federal Reserve and global uncertainty amidst trade wars and emerging markets weaknesses have increased USD strength, causing the Yuan to breach the key 6.90 figure last month. Widespread selling of the unit has caused the People’s Bank of China to launch offshore bills in Hong Kong to manage liquidity and stabilize the currency. Currently, the currency pair is testing March 2017 resistance levels in the 6.89-6.91 range.

USD/CNH Daily Chart

USD/CNH Gaps Higher After Foreign Reserves Data, Trade Wars Woes

Looking ahead, impacts of trade war hostilities continue to weigh on the Yuan. China completely stopped US crude oil shipments in August, the latest shot in the ongoing trade war. Further tensions may carve new lows for the Yuan while it awaits the release of September’s Caixin PMI data. In addition, the US Dollar may rally on the release of September’s US CPI data and possible volatility in emerging markets.

USD/CNH Trading Resources

--- Written by Megha Torpunuri, DailyFX Research Team