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MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
CNH
USD/CNH hasn't seen much follow on the downside today post the US ISM miss from Monday's session, which weighed on the dollar and US yields during NY trade. US yields have firmed modestly during the first part of Tuesday trade in Asia Pac, which has aided dollar sentiment.
- More broadly though USD/CNH tends to have an inverse relationship with the US-China PMI differential. The chart below plots USD/CNH against this differential (for manufacturing PMIs, the official one for China versus ISM for the US).
- That is, periods where the US ISM is sharply lower than the China manufacturing PMI don't often coincide with weaker USD/CNH levels. Indeed, the correlation between the two series is -70% for the past 5 years. This comes down a bit when we look at service PMI differentials, but only to -40%.
- One factor may be what happens to China export growth when the US ISM falls sharply. Such episodes may leave the China authorities reluctant see local FX appreciation.
Fig 1: USD/CNH Versus US ISM - China Manufacturing PMI
Source: MNI - Market News/Bloomberg
- The USD may also benefit from flight to safety flows during ISM slumps, which often coincide with US recessions. The second chart below plots the USD NEER (J.P. Morgan Index) against the US ISM level, which is inverted on the chart.
- Other factors in the context of the current cycle are lingering fears of higher inflation still driving Fed support for the USD in the near term.
- The China authorities have also been highlighting the weaker external backdrop in recent months, so again may be reluctant to encourage FX strength. Indeed, the CNY NEER has slipped to the bottom end of its recent range for 2023 over the past few weeks.
- The final point would be around scope for a further easing in monetary policy settings in China, which could be to aid the recovery, but all else equal, may act as a FX headwind.
Fig 2: USD NEER And US ISM (Inverted)
Source: J.P. Morgan/MNI - Market News/Bloomberg
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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