CHINESE YUAN AMONG THE KEY DRIVERS IN THE G10
The Chinese Yuan appears to be the main currency driver behind G10 FX. Yesterday’s break below 6.6700, sees USDCNH trading at its lowest level since March 2018, thus focus is now on for a test of 6.6000. However, some market participants have speculated that the removal of the reserve requirement ratio for FX forwards (effectively reducing the costs to short the Yuan) may have been a warning signal by Beijing that they wanted to slow the appreciation in the currency. The lower Yuan fix signals that the PBoC are yet to be notably concerned over the Yuan strength. Alongside this, as US election polls continue to show a comfortable lead for Biden over Trump, the blue wave trade has also been another factor supporting the currency as a democrat sweep reduces tail risks to the Chinese Yuan. However, should the speed of the appreciation persist, Beijing may begin to fire a stronger warning shot.
TRUMP RISK IS STILL THERE FOR THE YUAN
The risk to the Yuan in the near-term would be a narrowing in the US election polls with Trump closing the gap. Keep in mind, polls haven’t had the best track record in recent history, the 2016 US election being among main reasons why, thus it is difficult to completely take off the Trump risk. This has also been noted in the option space, as implied vols for the 1-month (covers the election) has picked, alongside risk-reversals moving in favour of USD over CNH.