FX Update: EUR mulls EU recovery package. USDCNH focus intensifying.

We continue to watch the USDCNY and USDCNH levels after both exchange rates almost precisely touched their all-time highs yesterday before pulling back slightly. The pull-back has deepened a bit further this morning, even after the National Party Congress in China officially approved the new security law for Hong Kong and after Pompeo declared yesterday that “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.” This brings the concern that the US will seek to change the terms of Hong Kong’s special trading status. That move would be a momentous one and the damage from any shift in the special relationship would go both ways as many US firms have set up shop in Hong Kong as their gateway to engaging with not only the local economy but also mainland China.

Just ahead of screen-time, we get the news item that the US will look to expel any Chinese students in the US linked to Chinese military schools.

Chart: USDCNH vs. the CNY basket
While the focus is on the immediate implications of any move above 7.18-7.20 in the USDCNH and whether this triggers unease across markets, if China allows its exchange rate to only grind slowly lower here rather than move quickly, the move may not drive wider unease. The US-China trade deal has a section on currency manipulation, but the wording is relatively loose, and China can point to its broader renminbi basket, which is still relatively mid-range (this index is only updated weekly – CNY a bit lower relative to last Friday’s close). So, the point is – momentum is more important than whether USDCNH, for example, slips quietly to 7.25 over the course of a couple of weeks in an environment where the USD is firming elsewhere.