US Dollar rallies on the back of Chinese Yuan weakness

The US Dollar gains after a risk-off picture start of the week.
China's economics numbers paint a bleak picture of its post-covid recovery.
US Dollar Index to print fresh monthly high again.

The US Dollar (USD) trades higher again after it continued where it left off Friday evening at the US closing bell. The Greenback-favored sentiment this Monday is built on the once again disappointing numbers out of China and the Chinese Yuan being sold. With Country Garden, an even bigger real estate developer than Evergrande, on the brink of collapse, Chinese loan data pointed to an 89% drop in distributed loans to companies and households. The Chinese credit crunch will further deteriorate its economic numbers and growth, threatening world economic growth in a spillover effect.

There are no important data points for Monday and the rest of the week. On Tuesday, US retail sales numbers will flavor the market, and on Wednesday the latest US Federal Reserve Minutes will be key data for further guidance and clues on where the US Dollar Index (DXY) might move later this week. Without pivotal data points, expect markets to be on autopilot with no real seismic shifts in current trends.

Daily digest: US Dollar rallies against Yuan

The Chinese Yuan weakens substantial against the Greenback and is being singled out.
Main headlines this Monday are on the Chinese property builder Country Garden., which is on the brink of a default and might need financial aid from the Chinese government.
Chinese loan distribution to companies and households dropped 89% for the month of July against June’s numbers. Loans are a vital item in an economy for companies that want to expand and for household consumption.
Forex markets are also gearing up for a shock intervention by the Japanese finance ministry as USD/JPY has hit 145 in early Monday trading. An intervention could see heavy US Dollar selling to get the USD/JPY exchange rate back down to 140 or 135 in a short period. In Japan, it is not the central bank but the finance ministry overseeing the exchange rate positioning.
The US Treasury will tap the market for a 3-month and 6-month bill auction.
Asian stocks are being slaughtered on Monday, with the Japanese TOPIX index down 1% at its closing bell. Hong Kong’s Hang Seng is down over 2%, Meanwhile US and European equities looked to be rebounding, and are now back in the red near the US opening bell.
The CME Group FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. The probability declined from above 90% last week as sticky inflation could mean the Fed might need to keep rates elevated for longer.
The benchmark 10-year US Treasury bond yield trades at 4.17% after the summary from last week’s US inflation data was that inflation is slowing down, though it remains sticky. This confirms that the US Federal Reserve (Fed) is right to hold rates steady for longer, while markets got it wrong with their presumed cuts in early 2024.

US Dollar Index technical analysis: gains secured

The US Dollar is trading sideways halfway through the European session after it continued its rally from last week and opens the week with gains against most major peers. The US Dollar Index (DXY) is increasing, printing another new monthly high. Special attention from a technical point of view for EUR/USD where the US Dollar is about to break both the 55-day and the 100-day Simple Moving Average and could see US Dollar strength helping the DXY to break a substantial cap on the upside.

For the upside, 103 as a big figure will be challenged today. A touch further up, the 200-day SMA at 103.37 will be a difficult cap to cross above. As no real big events are scheduled for this week, and already the DXY has printed a new monthly high this Monday morning, it is questionable if this sentiment-driven move will push the DXY above the important 200-day SMA.

On the downside, several levels will be tested regarding support. The first candidate is the high of Friday at 102.90. If that fails, look for 102.38 with the 55-day SMA and the 100-day SMA nearby as double belts for underpinning the price action in the US Dollar Index. Should some event or headline trigger a break-even below those two moving averages, expect to see 102 challenged to catch the falling price action.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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