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USD/CNH: Watch Chinese Yuan, PBoC for US-China Trade War Gauge

USD/CNH: Watch Chinese Yuan, PBoC for US-China Trade War Gauge

2019-08-09 18:06:00
Rich Dvorak, Junior Analyst
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CHINESE YUAN, PBOC FIXING LIKELY TO SERVE AS US-CHINA TRADE WAR BAROMETER

  • Spot USDCNH is currently trading above 7.1000 and suggests that US-China trade war fears remain elevated
  • Further weakening in the Chinese Yuan by the People’s Bank of China (PBoC) could fan the flames of the recent flareup in trade tensions
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Trade war tensions between the United States and China are heating up again following the latest news that President Trump plans on raising additional tariffs on Chinese goods, which sunk stocks in the S&P 500 Index and risk assets alike. Selling pressure accelerated after China’s central bank – the PBoC – weakened the Chinese Yuan’s fixing against the US Dollar to its lowest level since the Great Financial Crisis.

USDCNH VS S&P 500 INDEX PRICE CHART: 4-HOUR TIME FRAME (JULY 07, 2019 TO AUGUST 09, 2019)

USDCNH vs S&P 500 Index Price Chart Correlation US China Trade War

Chart created with TradingView

Most recently, Trump said the US is “not ready to make a deal” with China on trade and has “no choice but to do what he’s doing” regarding his decision to hike tariffs further. In turn, it could be assumed that the White House will move forward with levying the planned tax on Chinese imports.

PBOC WEAKENING CNY TO OFFSET TRADE WAR ESCALATION FROM TRUMP TARIFFS

The PBoC has increasingly cut the Yuan’s fixing throughout the week in an apparent retaliation to Washington’s tariff threat. With USDCNH now above the “taboo” 7.0000 price level, which has previously been defended by the PBoC when tensions flared up in December 2016 and October 2018, the Chinese Yuan could be at risk of weakening much further against the US Dollar.

Consequently, markets find themselves weighing the impact of a prolonged conflict between the world’s two largest economies as US-China trade war progress deteriorates once more shortly after the Trump-Xi G20 Summit meeting which little substantive progress came out of. Also, lingering uncertainty surrounding the US-China trade war in addition to higher tariffs will likely result in further downward revisions to global GDP growth.

USDCNH PRICE CHART: 4-HOUR TIME FRAME (JULY 31, 2019 TO AUGUST 09, 2019)

Spot USDCNH Chinese Yuan Price PBoC

That said, it will be important for markets to watch the direction of the Chinese Yuan for possible clues on US-China trade war progress and where risk assets head next. IG Client Sentiment data, which provides insight into retail traders’ bullish and bearish biases, could also shed light on market price action.

Spot USDCNH is currently trading slightly above the 7.10 handle with a steep uptrend since its spike above 6.9500 on August 1.

Moreover, lingering trade war risk has set USDCNH implied volatility back on the rise and pushed the USDCNH 25 Delta 1-week risk reversal reading to 0.7250, which indicates heavy call option demand as traders position for possibly-sizable moves to the upside.

Judging by USDCNH 1-week implied volatility of 7.23%, however, spot prices are expected to fluctuate between 7.0289-7.1711 with a 68% statistical probability. Seeing that currency option traders are pricing spot USDCNH to remain comfortably above the 7.0 price level, market sentiment and risk assets are likely to stay subdued in the near-term.

-- Written by Rich Dvorak, Junior 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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