Yesterday, the US dollar suffered badly. The story was that China was doing the Fed’s tightening work and that a rate hike might wait and wait.
24 hours make a big difference: the greenback is making a comeback on some Chinese calm and good data from the US consumer.
China
A third day of yuan devaluation awaited traders. However, the devaluation was much smoother and it was accompanied by soothing words from the People’s Bank of China.
The PBOC called a rare press conference, explaining the move, as part of a wider internationalization of the CNY. In addition, we heard that a fall of 10% is unlikely.
Are markets convinced by the Chinese authorities? Or perhaps is this just the counter trend?
It doesn’t matter.
In any case, stock markets rebounded and so did the US dollar. If China is doing OK, the global economy is not at risk. In addition, a more shallow devaluation means a more shallow “export of deflation” from Chinese goods into the US. Less deflationary pressures will allow the Fed to hike.
Retail sales
This figure disappointed so many times in recent months and has dampened expectations for a hike. Consumption, not only of Chinese goods, is key to the US economy.
A rise in sales in July and an upgrade of June’s numbers mean that growth is stronger in both Q2 and Q3 and that this could allow a hike at the end of this quarter.
USD higher
Given these two factors, we have a one-two punch move that favors the US dollar.
Tomorrow we have a US consumer confidence. Will the bright mood prevail and send the USD even higher? Or will we have yet another summer mood swing?
More:
- How CNY Devaluation Will Eventually Lead To EUR/USD Selling – BNPP
- How CNY Devaluation Will Eventually Lead To EUR/USD Selling : Elliott Wave Analysis