Dollar Stuck In The Middle; And China Jumps Into Hong Kong (CNH)

Dollar continues to trade in the middle of the pack today. It seems stuck between JPY and EUR on one end; and commodity currencies and GBP on the other…

US Dollar Index still in a range…a deeper correction or a thrust higher in Wave 5? Poor relative price action in the buck despite a very good jobs number on Friday can’t excite the bulls.

On the recent risk off days, JPY and EUR have acted well, while the others (AUD, CAD, & GBP) have been hit against the dollar; today we have the opposite, i.e. with US stocks stable this morning, commodity currencies and pound higher, but yen and euro are lower. It is an interesting pattern and will have more on this later—some rationales in the Part II of the 2016 Outlook.

The bound in commodity currencies this morning comes on the heels of more trouble for China—its stock market was down 5.3% and the People’s Bank of China (PBoC) intervened heavily into the Hong Kong market (primary facility for CNH trading) to support what is known as the “offshore” market for its currency—symbol is CNH instead of CNY (onshore market). CNH is less prone to Chinese government control and has been trading more cheaply than CNY, on anticipated further weakness in CNY; i.e. CNH is seen as a better measure of market forces, whereas CNY is still quite controlled by Beijing. The game being played with CNH is the carry trade, i.e. borrowing CNH, selling it, and using the proceeds otherwise as needed.

To thwart this, the PBoC stepped in and bought a lot of CNH, and effectively push short-term borrowing rates in Hong Kong sharply higher—note Hong Kong stocks took a hit for this, falling 2.8%; liquidity leaving markets does that (something we are seeing shaping up on a global scale; which was the key point of the analysis in Part I 2016 Outlook). 

CNY (onshore) versus CNH (offshore) Weekly:

Here is a look at the money market interest rate spike in Hong Kong as a result of China’s actions to support it currency:

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