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Wedge With Weaker DXY Diminishes


To recap, we saw a sharp reversal in USD/CNH post the Asia close on Friday to the low 6.7000 region, after earlier tracking above 6.7800 We closed just above 6.7200, which is where we currently sit in early trade today.

  • Better equity market sentiment on Friday helped, although Mainland equity indices still finished down for the week. The China Golden Dragon index gained nearly 3.9% last week though.
  • News out over the weekend on easing Beijing and Shanghai Covid related restrictions, coupled with more stimulus measures for Shanghai, can aid sentiment further in the early part of this week.
  • CNH also managed to close some of the wedge with the DXY index, although a gap still remains, see the chart below.
  • As we noted last week, such a wedge may persist until China's macro backdrop is on firmer ground, although the weekend news is a step in the right direction on this front.
  • 1 month implied vols for USD/CNH sit around 7.35%, having trended up last week. We are below early May highs of +8%. Risk reversals paint a more benign picture, sitting at 0.86 versus earlier May highs of +1.60.

Fig 1: USD/CNH & DXY (past Month)

Source: MNI - Market News/Bloomberg

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