The US-China political entanglement sees risk rise in the East – Guest Editorial


AxiTrader Global Chief Market Strategist Stephen Innes looks at this week’s movements in G10 currencies, Petrol currencies and Emerging Markets FX Asia carry trades

By Stephen Innes, Global Chief Market Strategist at AxiTrader

The RMB is getting caught in a new US-China political entanglement as the White House’s China hawks, who have Trump’s ear, are seizing the moment. Smaller spats are emerging between China and Australia, China and Germany, and even China and Japan, so Donald Trump is talking tariffs again – though he often says many things that do not always come true.

But given the moves in copper and CNH on Friday, it seems like the market is tentatively trying to price in the next phase of this economic calamity as the US government starts internal debate on Chinese reparations and retaliation.


The Australian Dollar 

AUD vols were much higher on Friday with AUDUSD trading about 100 pips lower from Thursday’s highs, along with US equity futures down 2% on the day. It was a double whammy of toxicity for A$ and again this morning it’s opened a touch lower as sentiment continues to shift.

Interest in AUD downside has been quick to resurface, which mostly focused on the spot out to the one month, but this could stretch out along the curve tangentially as the level of political imbroglio rises. 

But also compounding a shift in the A$ view is that the pace of China’s consumption has slowed and is steadying below trend levels. With a good chunk of the word’s economies not consuming or buying made at home out of concern for domestic interests, it’s now debatable how much China can outperform. So it’s back to 3-5 day views on currency markets until global economies reopen, then the economic data becomes more meaningful.

The Euro

Peripheral spreads widened as the ECB announced no additional PEPP, disappointing some. EUR came under pressure before strengthening on what looked like month-end rebalancing flows. The lack of retracement of the up move in the new month might indicate that the market was caught wrong-footed on bearish EUR positions.

 In light of the price action in other asset classes over the last 72 hours, particularly sagging stock markets, one might see EURUSD running out of steam this week.

The ECB measures announced last week fall well short of containing sovereign risks in Europe and suggest we could see a resumption of the long-end spreads to widen back to pre-PEPP levels over the coming weeks. That could signal the EURUSD lower on spillover risk effect. 

The Yuan 

We should expect the customary tweets from Global Times and other China bots slamming the USA, so this could be bidirectional for the Greenback as it’s bipartisan for the US election risk and probably worth worrying about as the US versus China blame game gathers a head of steam.  \

Although the Wuhan lab is under CIA scrutiny, the White House has yet to reveal a smoking gun. But if the lab is the epicenter of the accidental outbreak and a cover-up, China could find themselves backed into a corner quickly if evidence does point in that direction. 

As far as the CNH goes, we’ve reached a particularly delicate standstill as it relates to the virus narrative, and it’s certainly not in China’s interests to encourage currency weakness as that would inflame the whole US canceling China debt obligations argument. The 7.15 USDCNH level has been a sharp inflection point for local Yuan traders and the PBoC in the past, so eyes and ears will be trained on the key pivot.

Petrol currencies 

The Ringgit

Following a volatile rebalancing process in physical crude oil markets, the outlook on oil sensitive currencies has brightened a bit as we bore bare to the Ringgit rallying on Friday – this despite a trade war-like sell-off on the Yuan as risk rises in the East. 

Norwegian Krone 

The NOK is one of the oil currency sensitive trades that could fly as the oil market begins its arduous rebalancing acts. There’s bound to be an increased conviction in NOK outperformance. First, the currency stands to benefit from the shifting distribution of risks in the oil market. And the NOK also fits well into our cornea divergence trade as the country is relatively well-positioned to weather the Covid-19 shock from both an internal and external point of view.

EM FX Asia Carry

Liquidity was inferior across the EM FX space on Friday, given the May Day holiday. But USD demand came back with a vengeance across the high yielders. Locally the focus remains on the Rupiah. The IDR has gone round trip coming into the year as one of the most favored EM carry trades, to brutally selling in March amidst the sharp drawdown in EM assets and then rallying by almost 10% in the past month on the market’s reach for carrying as the Fed hits the LBZ. But all eyes are on rising risk in the East. 

Find out more about AxiTrader here

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

Read this next

Retail FX

ThinkMarkets expands CFDs lineup to over 4000 ETFs and shares

ThinkMarkets has expanded its service offering by incorporating 2500 new CFDs on shares and ETFs on its ThinkTrader platform.

Retail FX

France regulator warns investors of Omega Pro,

France’s financial markets regulator alerted investors that scams related to Omega Pro Ltd are beginning to circulate, with the blacklisted firm capitalizing on the situation to run a range of “unrealistic” offers.

Digital Assets

Web3 platform Grand Time paid $2 million in token earnings to date

Community-driven Web3 platform Grand Time said its offering – which includes a multifaceted platforms and its native token – has been gaining significant traction highlighted by impressive operational metrics.

Institutional FX

FX volumes at MOEX halved in April as ruble gains gorund

Currency trading at Moscow Exchange (MOEX) halted its upward route in April as monthly volumes nearly halved from a month earlier.

Digital Assets

FTX US adds stock trading, fractional shares to crypto platform

FTX US, the American subsidiary of crypto exchange FTX has kicked off stock trading feature to its customers in an effort to compete with popular platforms such as Robinhood and eToro.

Industry News

UK FCA empowered to remove brokers’ permissions in 28 days

Businesses with permissions they don’t need or use, risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed.

Industry News

CFTC charges $44m Ponzi scheme but millions may have fled to foreign crypto exchange

The CFTC alleged that defendants transferred millions of dollars to an off-shore entity that, in turn, may have transferred funds to a foreign cryptocurrency exchange. None of these funds were returned to the pool.


Saxo Bank deploys Adenza to address Basel and EBA requirements

The integration of ControllerView will enhance Basel-driven capital calculations and reporting at Saxo Bank in support of the bank’s multijurisdictional capital and liquidity reporting requirements throughout Denmark, Switzerland and UK, with plans to expand into the Netherlands.

Executive Moves

ComplySci appoints CTO, CPO, and CLO to further regtech’s product expansion

ComplySci offers compliance software used by more than 1400 global institutions to identify risk and address regulatory compliance challenges.