The resistance level of 7.0 on USDCNY is really an important milestone. In the past this level was tested at the beginning of 2017 and October 2018, and now it has been officially broken. It is worth mentioning that it is not only from the weakening of the dollar, it is also depreciating similarly when comparing CNY to most of common currencies, , and this has raised the suspicion that this is a main purpose of Central Bank of China - PBOC. Today the market will continue to listen to "fixing" actions from the PBOC to see if they really want to stop the decline of CNY.
How will it affect the rest of the foreign exchange market?
Investors have had a lot of experience with the decline of CNY in the last four years - since the PBOC has taken action to "fix" since August 2015. The following are the correlations of the foreign exchange market through the weakening periods of CNY:
- August 2015 until the end of 2016 when the worry of CNY devaluation lasted;
- June-October 2018 when CNY responds to US tax imposition and;
- In May 2019 until today, it represents the breakdown of the "cease-fire" agreement of US-China war.
In such times, JPY often has the best performance. High-performance currencies like AUD are often the worst performing currencies. On a broader scale, the currencies of EM (emerging market) from the Asian region such as the Singapore dollar are showing an increasing correlation with China's moves. The currencies of CE3 (including Czech-CZK, Polish-PLN, Hungarian-HUF) are currencies that are least correlated with CNY even though they are also affected by the economic slowdown. And the last important point is that CNY depreciation in the current time makes the US monetary market intervention more obvious. ING is currently estimating this possibility at 30%.
The first signal from China
At least this time China seems care about this issue, they sent positive messages this morning and made the secured collateral somewhat cooling. Specifically, the PBOC announced that it will sell about $ 4.2 billion of government bonds in Hong Kong on August 14 to reduce the falling of the yuan.
What's next?
Currently, large organizations are still holding a negative view for CNY, specifically:
Westpac predicts CNY will fluctuate 7.1 in the short term;
Bank of America predicts CNY will continue to fall to 7.3 for 1 USD at the end of the year;
While Citi group is more pessimistic, it is assumed that CNY will fall to 7.5.
Summary:
Temporarily, there are some market cooling action from China, but the situation will get worse if trade war continues to escalate, especially when the US intervenes in the monetary market. In general, if the medium-long-term trade, we should still look for secured collateral for secure and short the high-performance currencies such as AUD, NZD.[/list]