USD/CNH Climbs Despite US Dollar Weakness as Fed Pressures PBOC

Chinese Yuan, USD/CNH, PBOC, Fed, New Zealand, US Dollar – Talking Points

  • Chinese Yuan Weakens Significantly Against Broadly Weaker US Dollar
  • New Zealand inflation data reflects soaring global inflation but misses estimates
  • USD/CNH rally pushes relative strength index into overbought conditions

Thursday’s Asia-Pacific Outlook

Asia-Pacific markets are expected to open higher today after the US Dollar fell against risk-sensitive currencies like the Australian Dollar and New Zealand Dollar. The high-flying USD/JPY even reversed course during US trading hours. The Dow Jones Industrial Average (DJIA) closed 0.71% higher as investors bought cyclical stocks. Netflix led tech stocks lower, with the tech-heavy Nasdaq-100 index closing 1.49% in the red.

The Chinese yuan was an exception against the greenback. USD/CNH hit its highest level since October 2021 this morning. The weakness may stem in part from the Federal Reserve’s hawkish turn in recent months, as the yield advantage of Chinese bonds fell sharply relative to US Treasuries. The People’s Bank of China kept its one-year prime rate at 3.7% on Wednesday, disappointing expectations of a cut.

In addition to the Fed’s actions, the recent weakness of the Japanese yen could complicate the PBOC’s room to maneuver, possibly fearing capital flight. However, the Fed did not deter the Bank of Japan. Yesterday, the BOJ announced a new round of bond purchases, reaffirming its support for an ultra-loose monetary policy. USD/JPY fell more than half a percent overnight.

A big question now is how long and how far will the fall in the US dollar extend. If the DXY index drops below the 100 level, it could lead to further weakness from a technical perspective. A weaker greenback would bode well for risky assets, especially in emerging markets. It could also help push up government bond prices in major economies. That’s actually what we saw today, with bond yields falling in Australia and New Zealand.

New Zealand released first quarter inflation data this morning. The Q1 figure crossed the wires at 6.9%, missing the Bloomberg consensus forecast of 7.1% and up from 5.9% in Q4’21. Overnight index swaps were valuing close to 50 basis points in the upcoming RBNZ rate hike for the May 25 policy meeting. The island nation will release non-resident bond holdings data for March later today. Today will also see Hong Kong’s March unemployment rate cross the wires.

USD/CNH Technical Outlook

The yuan has weakened significantly against the USD over the past two days, pushing USD/CNH above its 200-day simple moving average. This move also saw the Relative Strength Index (RSI) break through the 70 level, which represents “overbought” conditions, although this does not mean that prices will fall immediately. The race to the top can continue. However, a pullback may see support from the 200-day SMA supply.

USD/CNH daily chart

usdcnh technical chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter

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