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Against the backdrop of continued USD weakness, USDCNY dipped below 6.74 this morning, although the PBoC set the fixing rate even lower at 6.7307. Yesterday afternoon, we saw decent selling USD flows from corporates in onshore market, pushing the USDCNY from 6.76 to 6.7520. In general, the corporate flows have become more balanced in July while there were much more USD purchase flows in the first half of this year.
The forward curve has also lowered significantly in the past few weeks (i.e. CNY stronger), suggesting that the market tends to believe that there is little upside in USDCNY for the time being. Clearly, given the capital outflows have been easing due to administrative measures, the dollar movement will dominate the short-term dynamics of USDCNY.
Another shift and critical test, the sharp reversal for USD/Asia over the past few weeks are consistent with the bear trend for the broad USD. This follows the failure of a number of important resistance levels especially for USDCNH, USDKRW, and USDSGD.
Still, we are closely monitoring the next line of key support levels for confirmation of a deeper extension and continuation of the medium term downtrends. For USDKRW, the more immediate focus is on the 1118/1107 support zone (76.4% retracement/March-May lows/2014 trend line). While some near term pause can develop, the 1140/47 resistance/breakdown zone should maintain the short term downside risks.
Also, note the recent struggle to reassert the upside bias in USDCNH through the key 6.84/6.87 resistance zone raises the risk that additional range action can develop. Again, support in the 6.72/6.70 zone remains critical as it represents the 38.2% retracement from the October ‘15 low, as well as the breakout area from November ’16. Another key focus is on USDSGD, as the recent failure against the 1.39 resistance zone. Hence, we advocate shorts in 6w vs long 3m USDCNH straddle calendars strategy.
