Special Report: US dollar weaker across the board after Chinese data and rates turn the yuan and forex tide

Quick Recap

The US dollar is weaker this morning as traders start the first Friday of 2017 after a combination of a surge in yuan borrowing rates and continued improvement in Chinese, and let's be honest global, data. That's weighed on the US dollar supporting the Yuan and other currencies. 

The wash up is that in late New York trade (6.37am AEDT) offshore Yuan (USDCNH) has fallen 1.18% to 6.7849 while the onshore rate (USDCNY) is sitting at 6.8870 down 0.65%.

That yuan strength has been mirrored in the G10 currencies with the Euro up more than 1% to 1.0597, Sterling up 0.8% with the pound rising to 1.2416 while USDJPY is sitting at 115.52 after the Yen strengthened 1.47%. 

The commodity bloc is also stronger with the Aussie and Kiwi up around 0.8% at 0.7337 and 0.7026 respectively. The Canadian dollar is likewise stonger with USDCAD down at 1.3233. 

Asian Forex was stronger across the board as well with every single USD/Asia currency pair I watch in the red this morning. Likewise, Latam currencies are stronger as well after Banxico intervened in the USDMXN market overnight with reported purchases of $1 billion to drive the peso 1.44% higher against the US dollar. 

What You Need To Know - China and data

Given I'm on leave at the beach presently I've only had a weather eye on the markets over the past couple of weeks. But the moves in the PMI data across the globe and then HIBOR rates this week caught my eye and prompted this quick update on the state of play.  

The flow of purchasing managers indexes released in late December and then again this week has shown that it's not just the US that appears to have received a Trumponomics lift. This includes Europe and Germany. 

But it was the release of the Chinese Caixin manufacturing PMI Tuesday with a print of 51.9 versus the 50.7 consensus and then yesterday's 53.4 print - the strongest in 17 months - for the services PMI which reinforced that the world's second-biggest economy looks set for a continued period of solid growth. 

Throw in surging rates to borrow yuan in offshore markets - specifically Hong Kong - and yuan shorts are getting squeezed.

 

Yesterday the rise in borrowing costs in Hong Kong accelerated again. Having leapt to 16.94% on Wednesday the CNH HIBOR rate hit an even more punitive rate of 38.33%.

That makes it almost impossible for yuan shorts to profit from their positions and reflects a scramble for is an increasing scarce pool of offshore yuan as Chinese authorities batten down the hatches to stem capital flight.

The result has been a sharp reversal of USDCNH in offshore markets which suggests further strength in onshore yuan which the PBOC has already ben setting a little stronger than some thought this week.

  

Clearly China has a problem with capital outflows. Equally clearly China is fighting an action against those flows and the weakening of the yuan. Over the holiday period it widened the basket of currencies it includes in its basket in an effort to lower the impact and importance of the US dollar in its exchange rate setting regime.    

Equally clearly yesterday's price action shows the market is still short yuan, Yen, and so many other currencies against the US dollar.    

Anyone who trades currencies knows they are truly bi-directional. Perhaps we are at the start of the US dollar reversal while markets reposition in the couple of week's before Donald Trump is inaugurated to the US presidency.  

Now, back to the beach. See you on January 16.  

Have a great day's trading

Greg McKenna

Chief Market Strategist

www.gregmckenna.com.au

Please note: I usually look at 2 or 3 charts each day. These will not always be the same charts and the above is meant to help guide traders thought processes not offer advice.

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