The U.S. Dollar index (DXY) saw a decline of
0.3% this week, settling at 104.12 points. Conversely, the EURUSD pair
experienced a 0.4% rise, reaching 1.08500. The notable volatility originated
from China, where the Chinese offshore Yuan (CNH) unexpectedly plummeted last
Friday. As a result, the USDCNH surged by 0.8% to 7.2800, marking its highest
level since November 2023.
This sudden movement caught investors off
guard, especially considering the USDCNH had been trading within a narrow range
of 7.1800-7.2200, closely monitored by China's central bank. The absence of
clear reasons for this shift left traders puzzled, with discussions centering
on the unusual withdrawal of support for the national currency typically
provided by the central bank and major state banks of China. In response to the
news, the EURUSD dipped by 0.5% to 1.08100.
On March 25, China's central bank intervened
by significantly increasing its daily fixing on the yuan to 7.0996 for the U.S.
Dollar, a 250% gap from analysts' expectations. Consequently, the onshore yuan
exchange rate surged by 0.5% to 7.1900, while the offshore rate increased by
0.6% to 7.2320. The central bank again raised its daily fixing by 0.1% to
prevent further weakening of the yuan, prompting traders to adjust their positions.
They have probably recalled previous unsuccessful attempts to counteract the
central bank in autumn 2023 and retreated.
In the aftermath of these developments, the
EURUSD recovered by 0.4% since last Friday, and may continue to rise, buoyed by
the actions of China's central bank. However, the Euro faces resistance at
1.08400-1.08600 against the Dollar. Surpassing this level could pave the way
for further gains up to 1.09500. Notably, this resistance has proven
formidable, hindering the pair's ascent multiple times in March. Thus, whether
the Euro will rally to 1.11500 against the Dollar before experiencing a
significant decline remains uncertain.
The WisdomTree Bloomberg U.S. Dollar Bullish
Fund (USDU) observed predominantly neutral capital inflows over the past two
weeks, indicating that large investors may have already positioned themselves
or are awaiting clearer directional signals before taking action.
Looking ahead, with no major events expected
this week, market focus shifts to the U.S. Q4 2023 GDP figures, which are anticipated
to confirm a 3.2% QoQ. Additionally, the February PCE indexes in the U.S. are
expected to remain relatively neutral, with consensus forecasts pointing to a
2.8% year-on-year increase and a potential acceleration to 0.4% month-on-month
from 0.3% for the headline index. The core PCE index, excluding volatile food
and energy prices, is forecasted to hold steady at 2.8% YoY and decline to 0.3%
MoM.
Despite the contentious inflation figures,
investors may perceive some signs of inflation moderation. With sustained
pressure from China's central bank, the Greenback could find further reasons to
weaken against the Euro, potentially declining by another 0.8-0.9% to 1.09500.
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