The dollar has got another growth driver. The PBOC unexpectedly lowered reference rate of CNY/USD which, may indicate its willingness to weaken the yuan against US currency. This is usually seen as downside factor for Asian currencies which ultimately may also support USD demand.Markets’ risk-on/risk-off swings continue to depend on the progress of peace talks between Ukraine and the Russian Federation. This usually determines expectations of sustainability of the current trend in commodity inflation which, hinders growth of many companies. This is especially true in those countries that are dependent on commodities imports. There is also some attention to the situation in China, where the outbreak of covid forced authorities to reinstate covid restrictions in large industrial and commercial centers – Shanghai and Shenzhen. This bodes ill for production and could create ripple waves in supply chains, which also have implications for inflation. China, judging by their stance, are not much willing to deviate from the policy of “zero covid cases”.The role of renminbi in global FX have increased recently as since the start of the Russian special operation in Ukraine, CNY/USD has risen by several percent, which could look like the yuan is taking on part of the task of being a safe haven currency, like the dollar. However, the PBOC’s actions show that it may be willing to boost activity through exports growth and sees weakening of the yuan as a solution. USDCNY came out of a tight range gaining 0.7% in a few days:Coupled with covid measures, this maybe be regarded as a signal of some slack in China economy or at least concerns about a slack, which may lend more heft to the current story of safe heaven USD.If this interpretation of the yuan’s weakness is correct, Asian currencies, as well as ZAR and BRL, commodity currencies from the EM sector, could come under pressure as well.In this week, market movements will be also determined by the expectations regarding upcoming FOMC meeting, which will be held on Wednesday. The Fed is apparently forced to deliver a vigorous response to inflation shock, especially in the very sensitive (both politically and economically) spending item both US households and government – gas. Barring significant de-escalation in Ukraine (which could quickly unwind a large part of geopolitical premium in the dollar), USD looks poised to extend rally past recent highs.In terms of technical analysis, USD overbought conditions have eased after the currency index soared to almost 99.50 in a very short period of time (two weeks), pulled back, and retested the resistance zone. Now there is a correction as part of the zone retest, there is no more flight into the USD based on surge of market risk-aversion, however rally looks persistent:Also, as it became clear from the last meeting of the ECB, the potential of the US Central Bank and the ECB to respond to inflation by tightening policies is now significantly different. The ECB gave a signal that it is extremely constrained in actions, since other indicators of the economy and the degree of involvement in the trade war with the Russian Federation do not yet allow moving the rate, while the US economy, at least judging by the trend in employment, is in much better shape for these actions. Hence the formation of corresponding expectations for the dollar.
Source: Tickmill
