The fall in equities markets, driven by COVID-19 concerns, nipped the renewed rotation out of US dollars in the bud overnight. The US dollar index rose a modest 0.25% in overnight trading. The EUR/USD retreated back under 1.1300 to 1.1280. The AUD/USD shied away from a test of 0.7000, falling to 0.6940, with the USD/JPY edging higher to 107.65. Looking across the G-20 space, currency markets have renewed their slumber, with the majors anchored within their recent ranges, while FX traders await developments elsewhere.
On exception is has been the Chinese yuan. The PBOC fixing was stronger again this morning; USD/CNY was set at 7.0207 today versus 7.0310 yesterday. Both the USD/CNY and USD/CNH are trading at 7.0180 today, well off yesterday’s 7.0000 low, but comfortably below their respective 200-day moving averages around 7.0380. The yuan is likely being boosted by foreign inflows into China’s red-hot stock markets. The government may well be trying to project a stable yuan to the outside world, to reduce domestic outflow pressure. Both the USD/CNY and USD/CNH look set to remain between 7.0000 to 7.0400 for the remainder of the week, unless the US dollar moves substantially.
Following headlines suggesting that the US may try to undermine the Hong Kong currency peg to punish China, the Hong Kong Monetary Authority (HKMA) has been vigorously intervening at the low end of the band today. The HKMA has been buying US dollars at 7.7500 for most of the morning. To be fair though, it has been doing that almost every day since mid-June. HIBOR rates have eased to a three-year low of 0.39% this morning. That is still above the US Fed Funds rate though, and thus downward pressure on USD/HKD will persist.
Speculating on the breaking of the Hong Kong dollar peg has been one of the worst trades of the last 25 years. I myself first attempted it during the 1998 Asian financial crisis and was unceremoniously seen off. The US government getting involved in the mix, though, may change the dynamic. But I cannot help but feel that Hong Kong and China will inflict the same pain on peg-breakers that I experienced 22 years ago.
Across Asia, regional currencies, like the majors, are almost unchanged from their finishing rates in New York. Asian currency traders prefer to wait for Europe to arrive for renewed direction. Only a surprise headline bomb will break the malaise.