11:00 AM (EST) Update
China Town, uh, I mean Chinese government decided to devalue its currency massively against the US dollar yesterday. With that, despite the initial gains, the USD/JPY among other major pairs erased all the up-moves today. Is that it for US dollar strength?
Why US Dollar Fell Today?
The dollar fell 0.6 percent against major currencies on Wednesday, coming under pressure as Treasury yields dropped on doubts over whether the U.S Federal Reserve will raise interest rates in the wake of China’s devaluation of the yuan.
For newbies lemme explain that China’s currency is officially called the renminbi. The yuan is the unit of account. If the RMB is traded onshore (in mainland China), it is referred to as CNY, whereas if the RMB is traded offshore (mainly in Hong Kong) it trades at the rate of USD/CNH, deliverable RMB located in Hong Kong. Thus, while the RMB is just one currency, it trades at two different exchange rates, depending on where it is traded.
How CNH Devaluation affected other currencies
The yuan extended its losses, dragging the growth-linked Australian and New Zealand dollars to six-year lows with it, while another set of disappointing Chinese data bolstered safe-haven currencies such as the yen.
The USD/CNH pair’s up-moves are continuing but some analysts argue if the surge continues, diversification flows may work against the US Dollar. Why? Ms. USA dance moves against Mr. ChinaTown has been effectively priced around ¥6.1000 and ¥6.3000 for the past year and is now going way up.
This in an indirect way had an impact on the EUR/CNH pair. You see, with the EUR/USD down from near $1.4000 in May 2014 to below $1.0500 in March 2015, it effectively dragged EUR/CNH lower as well: the pair dropped from above ¥8.7000 in May 2014 to just above ¥6.5000 in March 2015. EURCNH’s and EURUSD’s performances have essentially mirrored one another due the relative stability of USD/CNH over the same period. With the abc/CNH pairs surging, in order for the EUR/CNH and EUR/USD relationship to remain the same, it effectively means that EUR/USD needs to track EUR/CNH higher. With that, Ms. USA drops and so does the major currency pair, USD/JPY.
Nearly three years into ‘Abe-nomics’ and we’re still waiting for signs of growth or inflation in the Japanese economy. Last night, we saw another disappointing Producer Price Index print posting a 3% contraction from the year prior, missing analyst expectations and posting the biggest decline since 2009.
With China getting significantly more active in the currency market, this could serve to add even more pressure on the Bank of Japan to do even more in effort of stimulating the economy. The Bank of Japan minutes last night made no mention of additional interventions or QE discussions, and the Yen strengthened as investor’s hopes were diminished. This could put the Yen in an awkward position that may see safe-haven flows move into the currency should this global ‘wall-of-worry’ continue to grow.
The USD/JPY pair touched down the new key support level of 124 while remaining above the Ichimoku cloud. We can still see the pair remaining within the Head and Shoulder Bottom (H&S Dude) however today’s sharp decline also printed a bearish engulfing romantic candlestick pattern. With these (two bullish and one bearish signals) the future of the pair remains indecisive in the near term, however we are still leaning on further gains in a long term.
Forex Trading Idea
None. Wait for confirmation signals
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