Trade truce good for USD and Yuan

Comment by Bart Hordijk, Monex Europe

The three month trade truce between the US and China has kicked off the momentum for the Chinese yuan that made it bag the biggest 2-day gain against USD in a two years. High fives and hollering may have been abound among the suit-and-tie wearing governors of the People’s Bank of China as the 7.00 level on USDCNH seems to have been successfully defended – for now. This level lately came under fierce speculative attack, especially as worries rose that the trade tensions would significantly slow down the Chinese economy, while the PBOC would prove aloof about defending this level.

The recent move may have shaken out some weak short positions, which means speculators betting on a weaker yuan are now forced to take their losses, go home to lick their wounds, and for now lack the means to speculate against CNH for a while. This puts a floor under CNH, as this makes it less likely that a speculative attack will form again on the short run. Rumblings strengthening in the distance about the Federal Reserve potentially slowing down the pace of their rate hikes then further add to an environment which is conductive to emerging market currencies in general, of which CNH benefits as well, evidently.

Nevertheless it should not be forgotten that only mere weeks ago USDCNH reached a decade high and the chief boogeyman responsible for this – trade tensions - may be out of sight for now, but still hides underneath the bed. The concessions demanded by the US on agricultural imports and intellectual property protection may be things China is either unable, or reluctant to deliver on. Based on this we see the yuan stable over the coming weeks, but do not exclude the possibility that yuan’s boogeyman will be back in 2-3 months, to potentially haunt yuan through the 7.00 level.