China Move Highlights Looming Vacuum

China's surprise move to liberalize FX trading halted a weeks-long rally in the yuan but also highlights the window of opportunity on the US political scene (more below). The Canadian dollar was the top performer last week while the US dollar lagged. CFTC data showed euro longs the least-stretched since July. Moments ago, the stop has been changed on one of the existing Premium trades. 

The US Presidential election is a chance to transfer power every four years but it also creates a scheduled power vacuum that rivals may look to exploit.

China loosened FX hedging rules on the weekend to allow banks to hold no cash reserves against client yuan forward contracts. Previously they needed to hold 20% and that extra cost filtered back to clients.

The net effect is that it will now be easier to sell yuan forwards and that led to a 0.6% dip in the yuan at the open.

The timing also raises the risk that China could do more to weaken the yuan between now and the election or during the transfer of power if Biden wins. Last quarter was the best for the yuan in 12 years as China reopened much more broadly than almost anywhere and the government unleashed stimulus.

The trade front has been a particularly sore spot for US partners in the Trump administration. Some may simply hope for better under Biden but other may try to use this moment to recalibrate. China in particular bears watching. The yuan weakened to 6.98 from 6.68 from October to year end in 2016, during the prior election period. It finished last week at 6.68 and it would be no surprise if China wanted to start a new administration much closer to 7.00.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +174K vs +188K prior GBP -11 vs +13K prior JPY +21K vs +25K prior CHF +13K vs +13K prior CAD -18K vs -19K prior AUD +11K vs +9K prior NZD +5K vs +3K prior

Euro longs remain near extremes but they have pulled back in the last two weeks and the net is the narrowest since late July. The resurgence in virus cases – particularly in France – highlights the euro's vulnerability in the months ahead. The other notable move is the switch in cable positioning to net short ahead of a big week of Brexit negotiations.