USD/CNH retreats from two-year high on softer USD, covid hopes, US data eyed

• USD/CNH takes offers to renew intraday low, snaps two-day uptrend around the highest level since September 2020.
• Rebound in yields, stock futures underpin consolidation of USD gains ahead of US Michigan Consumer Sentiment Index.
• Shanghai eyes easing virus-led restriction after mid-May, Beijing pushes for three-day “stay at home”.

USD/CNH pulls back from a 32-month high, pressured around intraday low near 6.8080, as consolidation of the US dollar gains joins hopes of covid recovery in China during Friday’s Asian session.

Shanghai’s plan of zero-COVID at the community level by mid-May, backed by comments supporting 64% vaccinated people above age 60, seems to renew optimism in China. Also keeping the expectations firmer is a three-day “at home” stay for residents for covid testing to tame and confirm the covid resurgence in Beijing.

Elsewhere, the latest pullback in the US dollar takes clues from the US Treasury yields’ bounce off a two-week low, as well as mildly bid stock futures. The US 10-year Treasury yields portray a corrective pullback after refreshing a two-week low the previous day, around 2.89% by the press time, whereas the S&P 500 Futures print rises 1.0% while licking its wound near one-year low.

It should be noted that the US Producer Price Index (PPI) matched 0.5% MoM forecasts and kept inflation fears on the table the previous day. However, Fed Chairman Jerome Powell reiterated the expectation that the Fed will raise interest rates by half a percentage point at each of its next two policy meetings. The same could have triggered the rebound in yields as markets anticipate 75 basis points (bps) of a rate hike. On the same line were comments from San Francisco Fed President Mary Daly who mentioned, “Is it 50, is it 25, is it 75? Those are things that I’ll deliberate with my colleagues, but my own starting point is we don’t want to go so quickly or so abruptly that we surprise Americans”.

Above all, the monetary policy divergence between the Fed and the People’s Bank of China (PBOC) keeps USD/CNH elevated. For the short-term directions, preliminary readings of US Michigan Consumer Sentiment data for May, expected 64 versus 65.2 prior, as well as headlines concerning coronavirus, geopolitics and Fedspeak will be the key to follow.

Technical analysis

Although overbought RSI conditions triggered the latest pullback from a fortnight-old resistance line, near 6.8320 by the press time, bears should remain cautious until the quote stays beyond the 6.6100 mark, comprising April 25 high and May’s low.