The People’s Bank of China (PBoC) has moved to arrest to the persistent sell-off in USDCNH that has been in place since May by trimming the cost of selling CNH.
However, a rally in USDCNH should prove short-lived.
The central bank removed the required 20% risk reserves ratio for financial institutions for sales on some FX forward contracts. Any building upside pressure in USDCNH will be evident in the forward curve, and it is simply not there.
And primarily due to the collapse in forward curve vols — I think the short dollar momentum trade will continue into the US election barring adverse vaccine developments, and there will be extremely positive decay.
Global equities have started to price the US election outcome very favourably, especially the cyclical exposed European stocks, and we could expect currencies to continue following in suit.
FX traders were taking a lively read for cyclical-heavy Europe, and thought of a Democratic sweep could well be the catalyst for some real rotation into Europe. Both macro and longer-term strategic funds have been buying the EURUSD in earnest the last few weeks to redeploy in a European equity cyclical binge.
But the top side attempts have been running into a lot of supply from interbank types due to the resurgence of Covid-19 cases in EU and a more dovish spin on the European Central Bank (ECB).
Overall, when the FX markets digest and clear the PBoC benevolent push back on the Yuan, I suspect the US dollar will continue to make new lows ahead of the election.
In EURUSD, there are no real levels of consequence ahead of 1.1950-1.20. USDCHF has broken support at 0.9130. And I do not see it getting back above 0.9160 now.
But USDJPY stands out to me as having not moved at all, but given what gold and USDCNH are doing, even with the PBoc inventions which are getting faded, there is a risk of another slip down to 104.
The Japanese Yen (JPY) and AUD election weights and vols in general, remain under pressure. With the 1m having rolled over the US election on Nov. 3 last week, direct supply for election dates from the systematic sellers is not disappointing from a volume perspective.
However, USDJPY vols are bid this morning from relatively low levels with spot grinding lower.