FX Update: Yuan-yen mean reversion is on. USD on a rampage.

FX Trading focus: Yuan-yen mean reversion. USD on the rampage versus cratering CNH, commodity- and EM-currencies and stering.

My colleague Redmond Wong has penned an excellent piece on the CNY move of the last week and the outlook for strong mean reversion in CNH relative to the Japanese yen, as China has finally moved off its semi-peg against the rising US dollar in recent months in allowing the recent steep valuation in the currency. Meanwhile, after its long bout of extreme weakness, the JPY has begun matching USD strength in recent days and could even outpace the greenback on further commodity weakness and a consolidation in global bond yields. Any nudge from the Bank of Japan indicating a softer attitude toward yield-caps would be an additional kicker, if this Thursday’s meeting may be too premature for expecting such a development.

The CNH move has broadened out the USD strength over the last few sessions and brutally so when we look at the likes of the sudden jolt lower in AUDUSD within the G-10, but also as most EM currencies have been marked sharply lower versus the rising greenback on a wave of risk aversion. As long as commodity prices continue to weaken (possibly a reflexive development in the first place), the CNH move may continue, though I have a hard time believing that the pace of weakness will continue for long at the remarkable >1% move we saw today. (Small update: Just before finishing up this update, China was out cutting its banks’ RRR for forex by a percent to ease pressure on the yuan and triggering a sharp consolidation. This suggests it would like to see a slower pace of weakness, or maybe even hopes of signaling “enough is enough for now” )

Chart: GBPUSD
Sterling is taking a broad beating, as well it should, with the economy beset by supply-side limitations, a contracting fiscal outlook and a cost-of-living crisis that is already showing signs of crimping real growth, with last week’s weak March Retail Sales and second-lowest ever April GfK Consumer Confidence reading helping to spark the sterling meltdown on top of the pressure provided by the strengthening US dollar. And this is before the inevitable roll-over in home prices once higher rates begin to bite (the UK not alone here). All the while, the UK has a yawning current account deficit aggravated over the last 6 months by spiraling costs for its energy imports, while recent weak risk appetite reduces the potential for investment capital inflows to offset. The 1.3000 level in GBPUSD gave way on Friday with brutal force and the follow through to kick off this week looks ominous. On the chart, the eye is drawn toward the massive 1.2000 level – arguably the real range support when not considering the worst chaotic days in early 2020 during the reaction to the global pandemic outbreak.