Forex Comment Jun 16

As US Fed buys everything, US dollar down, yuan up

Fed and US government largesse trump second wave fears 

As US Fed buys everything, US dollar down, yuan up
Image: AFP

(ATF) By noon New York time on Monday, it looked very much like a down-day for US stocks. Then in came the Fed at 2pm and announced that it will immediately start buying individual corporate bonds. Stocks jumped. 

Later, the White House leaked that the administration is preparing a $1-trillion infrastructure program as the next whammy to revive the US economy.

For a while at least, traders and investors put aside a Beijing-centered new coronavirus infection cluster and and US second-wave worries and put their money on the side of the Fed and the fisc. US President Trump does not control the Fed, but has significant jawboning powers; and he does have substantial control of the fisc and won't let an opportunity pass to goose the economy and his reelection chances.

The risk-on mood carried over into Tuesday as Asian and EU shares, plus US futures, rose pretty much uniformly. The only damper was provided by North Korean leader Kim Jong Un (or his recently promoted sister) after trading hours when they blew up the inter-Korean liaison office in North Korea's Kaesong Industrial Complex. Korean stocks (Kospi) had been up over 5%. On the explosion, futures crashed.

The familiar pattern of risk-on = weaker dollar holds. The DXY (US dollar index) dropped as low as 96.43 at 2pm HK time and recovered a bit to 96.60 by 6pm.

The PBoC set yuan parity at a rather strong 7.0755 on Tuesday morning and it proved the appropriate move: CNY stood at 7.0778 at 7pm and its offshore cousin, the CNH, traded at 7.0690, near its mid-April 7.05/06 highs.

Going forward, I stick with my forecast of the yuan trading stably in the 7.05-7.10 range per USD even as yuan negative factors such as potential widening of the Beijing virus outbreak and an RRR cut by the PBoC appear to be in the offing.