Inside CNY DXY Divergence
Those who have traded USDJPY and followed CNH for a while, will have noticed a prolonged positive between USDJPY and USDCNH, as well as DXY and USDCNH. But as the two graphs in the upper channel show, USDCNH has diverged from DXY, as a result of broad CNH weakness lifting USDCNH and currencies such as EUR and GBP dragging down the DXY index. NOTE: CNH is offshore CNH and CNY is onshore CNY. I tend to mention the former.
Unlike most G7 economies, which offered consumers stimulus programs during pandemic lockdowns, China offered none, resulting into a disappointingly weak opening of the economy.
The PBOC is now forced to cut short term rates, while the govt is considering large stimulus packages at a time when G7 is in tightening mode. This has sent 10-year Chinese yields to 9-month lows, falling below yields of all major G10 nations, except for Germany and Japan.
What does this divergence mean for currency trades? Or for commodities? Does weakening Chinese demand portend weakness in metals? Even in gold? What about commodity currencies? Can we lump AUD and CAD in the same basket. Will China and oil act as the distinguishing factor between the two antipodean currencies? And what would you buy? EUR because the ECB says more rate hikes ahead? Or, GBP after recovering labour market implies a clear BoE rate hike next week? SO many permutations, so many considerations, some of which, we translate into tradeable ideas to take and to avoid for our WhatsApp Broadcast Group.
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