Daily brief: Chinese yuan faces another big test as US dollar surge goes unchecked

Tuesday’s Asia-Pacific outlook

Asia-Pacific markets face a risk-off move to start trading after the US dollar continued rising, the British Pound tumbled and Treasury and Gilt yields soared again. The benchmark S&P 500 fell more than 1% on Monday, in line with broader equity moves.

The 10-year Gilt yield rose above the closely-watched 4% mark after rising more than 40 basis points throughout New York trading. The 10-year Treasury yield rose as well.

The US dollar DXY Index rose against its major peers, including the Chinese yuan and Japanese yen. USD/CNH is trading around 7.17, putting it within 0.5% of its 2019/2020 high. USD/JPY is trading back within striking distance of the 145 level, which introduces the threat of another intervention by the Bank of Japan and the Ministry of Finance today. Will they take action if we hit 145? The risk-sensitive Australian dollar fell over 1% to break the 0.6500 level.

While down sharply this year, Bitcoin prices have held up reasonably well over the past week, considering the selloff in other risk assets. A recovery in sentiment and risk assets may see prices mount a solid move higher. Elsewhere, WTI crude oil prices broke below $77 a barrel, the lowest point since early January. Falling oil prices may help central bankers, but input costs require broader weakness to convince policymakers to back off from hiking rates further.

The stronger Greenback weighed heavily across the entire commodity space. wheat, cotton and corn prices fell in Chicago. Cotton was the largest decliner at nearly 5% despite a USDA report showing that crop conditions for cotton fell for the week ending September 25. European natural gas prices fell over 5%, an encouraging development that puts prices near the lowest since late July.

Macau, a special administrative region of China, announced that mainland tour groups would be allowed to enter the region starting in November. It’s an encouraging move following Hong Kong’s loosening of travel restrictions for visitors. The People’s Bank of China (PBOC) moved to increase the costs of shorting Yuan on Monday by imposing a 20% risk reserve requirement on forward contracts. Further action may come if USD/CNH continues to rise.

Chinese yuan technical forecast

The Chinese yuan weakened again on Monday, setting up USD/CNH for a possible test of its 2019/2020 high at 7.1964. Prices look primed to continue rising on a technical basis, with the MACD oscillator showing strong improvement to the upside, and the Relative Strength Index (RSI) rising above the 80 level, reflecting strong upward momentum. A pullback would have some room before meeting possible support points, with the 7 level and rising 26-day Exponential Moving Average present.

USD/CNH – daily chart

This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.