Seeking Alpha
Profile| Send Message|
( followers)  

The USD index is trading close to a 15-month low and direction remains firmly downwards as risk appetite continues to improve and the USD’s status as a funding currency remains unaltered. Whether it’s a weak USD driving stocks higher or vice-versa, US stocks are currently trading at 13-month highs, maintaining the negative correlation with the USD index.

One currency that has failed to take advantage of the weak USD over recent days is EUR/USD and its failure to make a sustainable break above 1.50 highlights that momentum in the currency is fading. EUR/USD looks vulnerable on the downside in the short term, with resistance seen around 1.5050. Speculation that China will resume CNY appreciation has taken some of the steam out of the EUR given that it implies less recycling of intervention flows into the currency.

The speculation that China will allow a stronger CNY follows a significant change by China’s central bank, the PBOC to its stated FX policy. The Bank removed the statement that it will keep the CNY “basically stable” and noted instead that foreign exchange policy would take into account “capital flows and major currency movements”.

Although this does not mean the CNY will immediately strengthen it will add to speculation that China will allow some appreciation next year following a long stretch in which the CNY has effectively been stuck in a very tight range against the USD. The timing of the change in rhetoric should come as little surprise as it coincides with greater international calls for a stronger CNY to help rebalance the global economy as well as an improvement in economic data domestically.

Any change in stance on the CNY could be a significant factor in determining the direction for the EUR given that it not only implies less flows into EUR from China but also from other central banks in Asia which may take China’s cue and allow greater strengthening of their currencies versus USD. Given that central banks in Asia had been intervening to prevent local currency strength and then recycling this USD buying into other currencies, especially EURs, the change in stance could play negatively for the EUR.

Currencies are also a focus of the APEC meeting of finance ministers, with the draft statement agreeing that flexible exchange rates and interest rates are critical in obtaining balanced and sustainable growth. This has interesting implications given the FX intervention by Asian central banks to prevent their respective currencies from strengthening and attention will focus squarely on China’s CNY policy.

Source: Yuan Appreciation Speculation Hits the Euro