Forex Comment Sep 17

Dollar short squeeze? Yuan rise not shaken

Volatility will settle down as markets figure out that the Fed's decision on Wednesday has in no way changed either US or Chinese economic or currency fundamentals 

Dollar short squeeze? Yuan rise not shaken
Image: AFP.

(ATF) The US Fed sees rates at or near zero through till 2023. But that did not please US stock traders and investors and kicked loose an equity sell-off that continued into Asia and Europe on Thursday.

Why?

The Fed had accompanied the zero-forever pledge with a downbeat economic forecast, which – so the investor logic – should have been accompanied by more monetary easing action now rather than just a future pledge. Disappointed punters sold.

I see the simultaneous uptick in the US dollar index (DXY), which reached 93.5920 at 11am HK time (highest since mid-August), as a knee-jerk reaction, not as the trigger for a possible US dollar short squeeze, as Bloomberg surmised.

As of this writing at 5pm HK time, the DXY had come back in to 93.1810. No trace of a short squeeze. The dollar fundamentals remain miserable and the long-term zero rates the Fed promised point to further greenback gloom.

As the USD rose in Hong Kong during the morning hours, the dollar/yuan rate exhibited some uncommon – in recent months – volatility.

At 9am, the PBoC had set CNY parity at 6.7675, the highest since May 8, 2019.

However, by 11am, CNY had dropped to 6.7800 before it started strengthening again in the afternoon as the DXY climbed back down from its midday heights.

At the close of the HK business day, the offshore deliverable CNY (or CNH) is fluctuating in the 6.7648 to 6.7712 range.

Volatility will settle down as markets figure out that the Fed's decision on Wednesday has in no way changed either US or Chinese economic or currency fundamentals. The interruption of the yuan's upwards tear will prove strictly temporary as the US recovery slows and the Chinese one picks up momentum.

I see the April 19, 2019 CNY level of 6.7042 as the next yuan target on its longer-term strategic climb to 6.0000.