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  • USD/CNH charts a strong recovery from the 100-day SMA support. 
  • Yield curve steepening may force the Fed to announce some kind of yield curve control. 

USD/CNH has bounced up strongly from key simple moving average (SMA) support, possibly tracking the broad-based recovery in the US dollar. 

At press time, the pair is trading at the session high of 7.0766, representing a 0.3% gain on the day, having found bids at the 100-day SMA of 7.0537 in early Asia. 

The American dollar is gaining ground against majors except for yen despite speculation that the US Federal Reserve may step up bond-buying or simply present a more dovish outlook to cap the rise in longer duration bond yields. On Friday, the US yield curve, as represented by the spread between the 10- and two-year yields, widened or steepened to around 72 basis points on Friday to hit the highest level since February 2018. 

Moreover, the upbeat jobs report released Friday revived speculation of a V-shaped economic recovery, leading to a steepening of the yield curve. Some observers think the steepening of the curve would force the Fed to implement yield curve control, whereby, it would target some longer-term rate and commit to buy enough long term bonds to keep the rate from rising above its target.

The fact that the dollar is gaining ground against the offshore yuan and major currencies, but suffering losses against the yen suggests the market is pricing a chance of some kind of yield-curve control from the Fed. Note that the Bank of Japan (BOJ) has been running a yield curve control for almost four years. 

While the focus is currently on the Fed, investors should keep in mind that the US-China tensions are still lingering. Moreover, President Trump is widely expected to step up the anti-China rhetoric ahead of the Presidential Elections. The yuan will likely come under pressure if the tensions escalate. 

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