Emerging Market Turmoil Boosts Demand: US Dollar Stays Strong as Chinese Renminbi Faces Pressure

FX Daily: Unruly EM currencies keep the dollar in demand

The combination of US yields at their highs and some intense pressure on emerging market currencies are maintaining the US dollar's status as a worthy safe haven. Today's focus will be on whether the Chinese renminbi falls any further after the surprise rate cut overnight and what should be some decent US July retail sales data. Expect the dollar to stay bid.

 

USD: Strong US retail sales should help

The dollar pushed ahead around 0.7% yesterday as pressure on EM currencies around the world encouraged more dollar demand. Very much in focus remains China's renminbi (CNY), which hit a new low overnight after the People's Bank of China surprised with a 15bp rate cut in its Medium Term Lending Facility. USD/CNH (the liquid offshore pair) has pushed up to a new high for the year above 7.30 and has its sights set on last October's high at 7.3750. We mention the renminbi so much in this dollar section since weakness drags most of the Asian FX complex with it and provides a bullish undercurrent to the dollar across the board.

Nonetheless, a rate cut from China is a stimulus and perhaps means that some of the commodity currencies do not have to fall as much. The rate cut also provides a tailwind to renminbi-funded carry trades. In terms of what comes next from China, we could possibly see a cut in the required reserve ratio (RRR) on FX deposits - this was cut to 6% from 8% last September in an attempt to take some pressure off the renminbi.

In quiet markets, the US dollar might also be getting some support from events in Argentina (see below) and the market is watching USD/RUB trade through 100. Here, the Central Bank of Russia has an emergency rate meeting today, which is expected to result in a large hike and perhaps some tightening of capital controls. 

For the dollar itself, July US retail sales should be strong and keep US two-year yields near 5%. It seems the market is indeed settling into the view that the policy rate will be kept at these levels for an extended period - providing few reasons to sell the 5%+ yielding US dollar.

DXY can probably trade bid within a narrow 103.00-103.50 range today.

And please take a look at our August edition of FX Talking for all our latest FX views.