Asia Open | Forex: Yuan the critical bellweather everyone’s talking about

Market Analysis / 2 Min Read
Stephen Innes / 08 May 2020

Yuan Watch

This is the critical bellwether that everyone’s talking about.

Some signs of easing tensions between China and the US have contributed to a vast unwind of long USDCNH hedges that started to build last Friday when the RMB complex fell prey to the fresh US-China political quarrel. But, given the delicate economic predicament as it relates to the virus narrative, the last thing the market needed was for traders to dive headlong into their trade war playbook. 

The US. trade negotiator Robert Lighthizer and his counterpart Liu He are scheduled to have a call to discuss progress on a phase one trade deal between the countries that had looked in jeopardy of being repressed by President Donald Trump.

USDCNH closed the gap with yesterday's USDCNY fix supported by a more significant than expected trade surplus and trade calm. 

Still, the rhetoric between the US and China over the origin of Covid-19 has turned quite harmful recently, especially with senior officials reportedly exploring proposals for financial compensation from China. But, heading into the weekend markets have dodged the first salvo.

Since it’s not in China's best interest to weaken the Yuan and – assuming that the modest tariff reduction under the phase one agreement holds post phone call – the Yuan could move back down to 7.05 level. That then brings my overly optimistic year-end 6.90 call back in the ballpark again.

The Australian Dollar

The Australian dollar leaped over two critical barriers on the economic front as beats on domestic and China trade data provided the lift-off spark to send the Aussie higher, rallying in sympathy with the Yuan. The Asahi cash acquisition of Carlton & United (16 bio +AUDUSD or maybe +AUDJPY) was cleared by the Aussie Foreign Investment Board, with the deal expected to be completed June 1. This, along with the return of Japan after Golden Week, has taken AUDJPY higher and the trade calm added the cherry on top. 

The Euro 

The news flow remains negative, but the EURUSD’s inability to seal the deal below 1.0775 triggered profit-taking as the markets now pivot to Friday's informal Eurogroup meeting and what could be dollar dread for the Greenback: tonight’s NFP number. Given the amount of negative rate chatter going on, owners of the US dollar are starting to take note and not in a positive way.

The Ringgit 

The Ringgit will continue to struggle for direction into the weekend. Despite an easing in US-China trade tension and better than expected China data, it hasn’t translated into higher oil prices, which weigh negatively on the Ringgit. Oil traders en masse think oil prices have run too far ahead of econo

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