Forex Comment Jun 04

As risk-off mode sets in, dollar decline halts; yuan steady

Chinese currency likely to weaken before the strength of the Chinese economy kicks in to lift it  

by Uwe Parpart
As risk-off mode sets in, dollar decline halts; yuan steady

(ATF) Late declines in US stocks on Wednesday signalled a pause in the prevailing risk-on sentiment. Asian stocks picked up the signal and traded sideways on Thursday. European equities amplified the risk-off mode as did US futures.

For the US dollar, this was a sign of relief. It had fallen well below the 200-day moving average on the DXY (dollar index) and hasn't quite regained neutral territory yet. But at 7pm HK time, the index stood at 97.5400 (up 0.30%) and rising. 

Are we seeing just a breather for positive global equity sentiment or a more prolonged pause?

S&P500 valuations are definitely stretched. But looking at the surprisingly positive performance of the Chinese economy, the massive German stimulus package of EUR130 billion ($145bn) and equally impressive fiscal moves by Korea and Japan, there are good reasons for optimism ... provided that US President Donald Trump, desperate about his reelection chances, doesn't throw another spanner in the works.

The People’s Bank of China (PBoC) set yuan parity at a relatively strong 7.1012, the strongest since May 22. With the onset of risk-off sentiment and dollar gains, the yuan could not hold that level. It traded at a significantly weaker 7.1199 at 7pm. CNH, the offshore CNY, stood at 7.1256.

I see the yuan weakening as a tit-for-tat reaction to USD strengthening, not anything inspired by inherent yuan softness. Both onshore and offshore CNY are trading somewhat above the midrange since mid-March, but provided the Chinese economy continues its outperformance, the yuan is likely to strengthen going forward rather than track lower.