USD/CNH bounces from five-week lows

USD/CNH rises as US-China trade tensions persist, S&P 500 futures erase gains.
Risk reversals hit three-month lows, indicating a weakening of demand for USD/CNH calls.

Omkar Godbole FXStreet Contributor

USD/CNH is flashing green in Asia seemingly due to lingering trade tensions.

The currency pair is currently trading at 7.0829, representing a 0.5% gain on the day, having hit a low of 7..0646 on Friday. That level was last observed on April 30.

The offshore Yuan is being offered, possibly in response to comments by a former Chinese trade official that the dragon nation is unlikely to roll back or reduce tariffs imposed on lobsters imported from the US. On Friday, President Trump threatened to impose tariffs on unspecified Chinese products and cars from Europe unless the trading partners reduce their duties on US lobsters.

Additional upward pressure could be emanating from the broad-based recovery in the US dollar. The greenback has taken back a majority of its early losses, possibly tracking the pullback in the S&P 500 futures. At press time, the futures are trading largely unchanged on the day as opposed to the 0.5% gain seen in early Asia.

Looking forward, USD/CNH could reverse gains, as global equity markets are likely to remain better bid, keeping the dollar under pressure due to renewed speculation about a V-shaped economic recovery in the US. Friday's US Nonfarm Payrolls report showed the economy added 2.5 million jobs in May, pushing the unemployment rate lower to 13.3% and beating the expected decline of around 8 million by a big margin.

Also, the options market looks to be anticipating a deeper decline in USD/CNH. One-month risk reversals, a gauge of calls to puts, has declined to a three-month low of 0.162, meaning the demand for call options or bullish bets is at the weakest since early March. The metric was hovering at highs above 1.5 about two weeks ago.

Technical levels

1. R3 7.1534
2. R2 7.1355
3. R1 7.1034
PP 7.0855
1. S1 7.0534
2. S2 7.0355
3. S3 7.0034

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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