Currencies: Talk about a strategy!

Following on from my weekly commentary on interest rates, I wanted once again to make the link between monetary policy and the foreign exchange market. Due to diametrically opposed policies, the interest-rate differential between the USA and China has never been so wide since 2007, and this is weakening the yuan just as it continues to weaken the Japanese yen for the same reasons. Thinking they can prop up their currencies through massive intervention is as ineffective as it is costly.

Weak Chinese growth has multiple repercussions, starting with the foreign exchange market. While the yuan is suffering from the remuneration differential against the dollar and the euro, it is in fact the entire Asian zone that is affected: the yen, the kiwi, the aussie, but also the Thai bat and the Korean won, to name but a few. The chart below shows the performance of a dozen Asian currencies against the US dollar. It's not looking good, to say the least.

(Source: Bloomberg)

The dollar index is currently testing its 200-day moving average around 103.50. A clear break above this level will counteract the bearish view and open up upside potential around 107.10/15. At the same time, we'll be keeping an eye on the 1.0816/1.0760 support zone for the euro, a break of which would open up 1.0440/05.

The USDCNY is close to its October 2022 highs at 7.327, but the absence of sufficient negative signals argues for a continuation of the rise to +/- 7.40. The uptrend structure for USDJPY is very similar, suggesting a move to 147.93/148.28 before a possible return to the 2022 highs at 151.95.