FX Update: USDCNH breaks above 7.00. USD eyes Retail Sales.

FX Trading focus: USDCNH breaks above 7.00. USD eyes retail sales, new peak in long yields.

The reaction in US yields and the US dollar after the far stronger than expected US August core CPI data from Tuesday is holding up well, with US yields all along the curve perched at or near the highs for the cycle and the 10-year US Treasury benchmark yield running out of range into the key high from June at 3.50%. The US Retail Sales report for August out shortly after this article is published is likely to drive the next step for US yields and the US dollar, which will likely move in the same direction. Somewhere out over the horizon, however, I wonder how the US dollar trades in the event a recession is afoot and investors are still marking down equities, not on a the challenge to multiples from higher yields, but on a profits recession. The past “norm” is for equities to only bottom out during the phase in which the Fed is rapidly easing to get ahead of a cratering economy. For now, the bout of risk off has seen NZD and NOK as the interesting pair of weakest currencies, with AUD and CAD not far behind and sterling struggling a bit more today, even as the market edges up the pricing of the Bank of England next week closer to 75 basis points (still only slightly more than 50/50 odds according to futures prices). Sterling almost can’t hope to perform well if risk sentiment

But perhaps most importantly, the USD sell-off picked up its pace a bit today on USDCNH breaking above 7.00 for the first time since the summer of 2020 and despite constant PBOC pushbacks via setting the daily fixing stronger for the last three weeks and more on a daily basis. Overnight, China kept its rate unchanged as well, though there were a couple of bright spots in thew news from China overnight, as local authorities have listened to Xi Jinping’s calls for easing up on property investment with a raft of measures. As well, the Chengdu Covid lockdowns are easing. Still, any significant extension above 7.00 in USDCNH will have markets on edge, particularly if the 7.187 all time highs come into view.

The USD strength and yield remaining pinned higher have emboldened prevented a further slide in USDJPY after USDJPY traded south of 143.00 overnight. We all know that the BoJ/MoF will more than likely step in if USDJPY trades north of 145.00 again, but note the more profound correction in crosses like AUDJPY, possibly a better place to speculate for a JPY resurgence if risk sentiment remains downbeat. That pair has rejected the recent extension above 97.00, though it probably needs to cut down through 95.00 together with tamer long global yields to suggest something bigger is afoot.

Chart: AUDUSD
The Aussie caught a broad, if brief, bid overnight on a strong August jobs report, but wilted again in today’s trade as risk sentiment deflated once again and as the move lower in the CNH versus the US dollar picked up a bit of extra steam and crossed the psychologically important 7.00 level. Watching the lows for the cycle here below 0.6700 for a possible extension to at least 0.6500 on a break lower and a retest of the cycle lows from June.