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Dollar Cascades Lower Versus Yuan, Is There Trade Potential Here?

Dollar Cascades Lower Versus Yuan, Is There Trade Potential Here?

2017-09-06 03:40:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Escalation in North Korean tension and the localized trouble in US debt ceiling fears has leveraged USD/CNH pressure
  • Before Tuesday's measured advance, USD/CNH dropped for 14 consecutive trading days - a record for the series back to 2012
  • This pair's retreat eases manipulation claims evidence but interest will likely shift to exchange rate stability

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When you grow complacent about an important market of fundamental trend, you run the risk of missing both the deep market implications as well as the more immediate trade opportunities that can grow around such developments. The competition between the world's largest economies raises the stakes on this pairing, but investor interest is marred by the unique circumstances surrounding this pairings. Though its extent is not known, the market fully believes that the exchange rate is heavily influenced (a gentle word that some would replace with 'manipulated') by Chinese authorizes. Given the struggle to keep a steady pace of economic expansion in the 6 percent per annum range, avoiding the implosion of financial bubbles while not drawing the ire of trade partners, is obvious why influence on the currency is appealing and perhaps necessary.

There are few that doubt the presence of the Chinese central bank (PBoC) as well as the department responsible for foreign exchange (SAFE) in the system. The exchange rate doesn't readily follow the traditional risk trends, relative monetary policy or even economic baseline themes to clear trends. The offshore cross (USD/CNH) tends to move abruptly when it is convenient for the government. So, what should we take away from the Yuan's incredible 14-day rally versus the US Dollar - the longest since the offshore exchange rate has been tallied back to 2012? Is this a sudden surge in foreign investment into Chinese assets, the collapse of the Dollar despite limited further losses on other Greenback pairs or concerted effort by the authorities to take the pressure from trade partners crying foul off the table?

It is highly likely that the Yuan's rally these past weeks was a manufactured move - even if the motivation may be somewhat different than we anticipate. That said, there are limitations in ambition for such a drive. At a certain point, reducing claims of unfair trade advantage is outweighed by the actual reduction in Chinese exports abroad. It is likely that we have seen a transition to a level that is more conducive to Chinese authorities' aims. Now, as we head toward the Chinese Congress plenum on October 18, the interest is more likely to shift to a position of stability in the exchange rate. That puts USD/CNH in an awkward position: what is actually motivating its bearings and momentum? We focus on the USD/CNH and its trade opportunities in today's Quick Takes Video.

Dollar Cascades Lower Versus Yuan, Is There Trade Potential Here?Dollar Cascades Lower Versus Yuan, Is There Trade Potential Here?

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