Thursday ended with the EUR/USD being high above of local resistance of 1.10. What's the target now?
USD/CNH: doing the homework
And the nomination goes to…
On Monday, the US Department of Treasury released a semi-annual report to Congress. It contains information on major US trading partners, their respective foreign exchange policies (observed over the period June 2018 – June 2019) and the US’ stance towards each one.
A very prominent part of the document is dedicated to China. Specifically, ample reasons are given to explain the decision that China is no longer “designated as a currency manipulator” as it was before. This may well be seen as a part of the trade negotiations process between the US and China. There is even stronger weight to it as on Wednesday this week the two are expected to sign the Phase One deal.
Let’s have a look at the extract from this document and try to follow the line of the US treasury. It may help us predict the future moves of the USD/CHF to take into account.
The crime and the punishment
In the executive summary, the document says: “Over the summer, China took concrete steps to devalue the RMB. Subsequently, Treasury determined … that China was a currency manipulator, given that the purpose of China’s devaluation was to gain unfair competitive advantage in international trade”.
We keep in mind that the period this extract refers to is summer 2018. Let’s cross-check with the chart.
We can see that this summer saw USD/CNH rise to the level of 6.90, aiming at the strategic rate of exchange 7.00. Except for the late autumn 2016, CNH has not been so devalued against the USD during the last years. It surely contributed much to Donald Trump’s motivation to stop that. In other words, the selected sector on the chart is one of the main reasons why the US announced the trade war against China.
Later on, the report appreciates China’s commitment not to devalue CNH on purpose, among other obligations within the Phase One deal. That is concluded by the decision of the US Treasury to let China enter the list of “honest” trade partners once again… “at this time”.
The truth is that so far, we only have commitments announced, to be sealed on January 15. The accomplishments are yet to be seen. On the same chart, after mid-2018, USD appreciated against the CNH up to the level of 7.20. Only recently, it dropped to test 6.90 – exactly where it climbed to in the summer 2018 and what it got punished for. Everything will depend on how the US and China interpret the Phase One deal. Until now, the Chinese side has been pointing out that Wednesday is merely a temporary truce, not a final disarmament agreement.
Therefore, we know that the US will want to see USD/CNH drop further below 6.90, or at least not see it grow above. China, on the contrary, is interested to see the currency pair stay at the level of 7.00 or above. The performance of this currency pair will be to a great extent the result of how the sides manage the strategic conflict of interest. The two tigers stopped fighting for a while… keep watching.
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