USD/CNH reverting back towards Dec highs

• USD/CNH has completed a full 78.60% retracement of the December sell-off as the Yuan takes a coronavirus beating.
• The US dollar has also been a relentless factor pressuring emerging markets and the Chinese currency. 
• People’s Bank of China pumping stimulus, but markets looking for more. 

We have seen weakness in the yuan this year fulled by end of year flows in 2019 and the impact of a strong US dollar as well as the coronavirus. The currency pair has reverted towards the December highs, completing a 78.60% retracement of the range YTD.

China’s central bank, PBoC, cut rates last week on two separate occasions, but markets noted the caution action and are expecting more which will be required, hence there was little reaction compared to the currency’s movements in response to new cases of the virus since 20th January 2020. 

Markets are pinning hopes on fiscal stimulus. China will want to limit the amount of loans that go into asset and investment markets, so long term loaning is off the agenda, for now. Elsewhere, however, there is little room for additional stimulus. Some central banks are already experimenting with aero interest rates.

The Federal Reserve and European Central Bank and other central banks are probably counting on increased fiscal stimulus from governments. Either way, more monetary policy easing in 2Q20 will likely be on the cards from China to support the economy to recover from the ongoing epidemic. 

Coronavirus latest

The latest is that there are now 78,854 confirmed cases of novel coronavirus and 2,465 deaths worldwide, according to with the majority of the cases and deaths being reported in mainland China, followed by Japan and South Korea. Here are the top five countries to have experienced outbreaks beyond China:

1. Japan: 738 cases, 3 deaths, (639 cases on Diamond Princess cruise ship and 99 on land).
2. South Korea: 602 cases, 5 deaths.
3. Italy: 132 cases, 2 deaths.
4. Singapore: 89 cases.
5. Hong Kong: 74 cases, 2 deaths.

– more on that here, however, while the numbers of new confirmed cases begin to increase again, then the yuan will be even weaker against the dollar.

The US dollar has been supported YTS by a host of tailwinds, although Friday’s data took some wind out of its sails, with the DXY dropping from the highest level in a decade, a few points from the 100 level in the DXY, by 0.70% to a low of 99.23. This week will give us more to go on from the economic data side of things with the Federal Reserve’s preferred inflation measure – PCE Inflation. 

USDCNH levels