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Is USD/RMB heading to 7?

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Last week, the RMB appreciated 2.5%, the highest in 2 years, but some indicators show that trend might falter in the coming week :

  1. The three-month risk reversal in USD/RMB advanced this week for the first time since April. The USD/RMB call options cost is higher than a similar USD/RMB put option.
  2. The cost of getting long USD/RMB (short RMB) remains low the next day USD/RMB forward point is at the lowest since January.

Skandinaviska Enskilda Banken and Natwest Markets think the RMB should resume its decline after easing lockdowns in Shanghai last week spurred the biggest gain in 2 years. “While the domestic conditions in China may be showing signs of bottoming out, the dollar will be in the driving seat, and we’re still going to see yuan weakness,” said Galvin Chia, emerging market foreign exchange strategist at Natwest Markets in Singapore.

EUR/USD extended to 1.07

The euro raised to 1.07 after reaching a 5-year low after ECB made clear it would end this negative rate policy. The spread between two-year German and U.S bonds narrowed to 214 bps, the lowest since January. For two years, Germany and U.S have been highly positively correlated to EUR/USD.“The hawkish pivot from the ECB is helping to provide more support for the EUR in the near-term,” said Hardman, a foreign exchange strategist at MUFG. The yields on two-year German bonds are more sensitive to rate hikes than longer maturity debt and outperformed U.S Treasuries. As long as the spread continues to narrow, it should support the EUR, at least for the near term, because the strong dollar still dominates the picture in the medium term.

What’s in the pipe?

  • FOMC minutes Wednesday
  • ECB publishes its Financial Stability Review Wednesday
  • Bank of Korea rate decision Thursday
  • US GDP, initial jobless claims Thursday
  • US core PCE price index; personal income and spending; wholesale inventories; University of Michigan consumer sentiment Friday

FX rates

USD/JPY @ 126.99 - Bullish trend

EUR/USD @ 1.0698 - Bearish trend

GBP/USD @ 1.2533 - Bearish trend

AUD/USD @ 0.7102 - Bearish trend

USD/CNH @ 6.6795 - Bullish trend

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