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US dollar strength was blowing in yuan after CNY/JPY hit record highs -by Ecork

USD, DXY, USD/CNY, USD/JPY, EUR, AUD, CAD, NOK, NZD – Talking Points

  • US Dollar Reached 20-Year Highs, But DXY May Need More Rally
  • Regional bloc currencies and commodity currencies may be at the whim of Chinese policy
  • USD/CNY could hold the key to dollar strength on a large scale. New heights for DXY?

The US dollar has found broad-based support since the middle of last year. The DXY is still at 20-year highs but this largely reflects the weakness of the Euro and the Japanese Yen.

The DXY is a US dollar index that is weighted against the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%).

Commodity block currencies such as the Australian dollar, Canadian dollar, Norwegian krone and New Zealand dollar have been much better and are still a long way from the lows seen against the US dollar at the outbreak of the pandemic.

However, the recent rally in the “big dollar” has taken its toll on commodity-linked currencies. This is despite the massive increases in commodity export prices since the Russian invasion of Ukraine.

The USD/CNY exchange rate may have a lot to do with this USD strength over the past few weeks and could provide clues for further moves.

The Japanese yen fell significantly in March and into the end of April. Although many Japanese government officials spoke of their “concern” about foreign exchange volatility, the yen’s weakness was seen as positive for their policy objectives.

A problem arose when the exchange rate between the Chinese yuan and the Japanese yen reached its highest level since the early 1990s near the end of April. China and Japan are the world’s second and third largest economies in terms of GDP, respectively. They are in close geographic proximity.

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The effect of this somewhat sudden rise in China’s currency with one of its major trading partners led the People’s Bank of China (PBOC) to devalue the yuan against the US dollar.

The moment this came to light, the Yen eased its acceleration from weakness against the US Dollar and, to a lesser extent, against the Euro. However, all regional currencies depreciated against the dollar as well, notably IDR, INR, KRW, MYR, SGD, THB and TWD.

Commodity block also sank. The future movements of these currencies may depend on the Chinese and their willingness to depreciate the yuan.

The fundamental background of the Chinese economy remains challenging due to the zero-tolerance policy on Covid-19 that continues to arouse optimism.

Chinese policymakers are clinging to several reins in an effort to stoke growth, but the exchange rate appears to be the weapon of choice for now.

Further acceleration of the yuan’s depreciation could trigger bouts of weakness across many currency pairs against the US dollar.

The USD/CNR exchange rate may be affected by any resumption of the yen’s weakness against the dollar. These overlapping dependencies of currency pairs may have more play.

— By Daniel McCarthy, Strategist for DailyFX.com

To connect with Daniel, use the comments section below or Tweet embed on Twitter

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