Forex Priorities and Policies

Let's recap the week's gentle rumblings on FX from policy makers, before shedding light on CNH below, says Adam Button of ForexLive.com.

US Treasury Secretary nominee Janet Yellen said the US would adhere to market-based determinations of FX rates in her confirmation hearing Tuesday. Never mind that record-breaking QE is outright manipulation of the bond market and indirect FX intervention.

On Thursday, ECB's Lagarde was silent on the euro's direction, while warning of double-dip recession in the Eurozone. On Friday, USD reversed the week's course to rebound against all major currencies, save for EUR. So, what do we make of the inv H&S in DXY?

All currencies ended the week higher against the US dollar, but on Friday, the greenback reversed course and strengthened against all currencies (including gold and silver), with the exception for EUR. 

The ECB has been clear that it doesn't want a stronger euro, especially with the Eurozone expected to recover slowly from the pandemic. This week's ECB decision will be all about the levers it can pull to keep the euro from appreciating further.

EUR/USD has risen to 1.21 from 1.06 at the pandemic low and it's near a two-year high. More worrisome for the ECB is that if it rises another 400 pips, it will be at the highest since 2014.

The US has the ability to easily monetize debt but with Eurozone deficit rules, it's much tougher. That leaves policymakers in the bloc with few options in the face of FX strength.

CNH Indication

China has shown it can be bullied by the US on the currency but with a less antagonistic President, they might attempt to weaken the yuan. We have already strarted to see USD/CNH pushing further, while DXY bounced off the neckline of its inv H&S. Ashraf highlighted last week that USD/CNH is increasingly serving as parth foward for selected USD pairs. 

Other countries will also have to continue to navigate US currency policy. Switzerland was named a currency manipulator in the latest Treasury report and that gives the Biden administration some leverage as they enter office.

With the presidential inauguration out of the way, we keep an open mind as the policies of the new administration start to unfold—tax decisions, energy policy, and foreign/economic policy vis-a-vis China. The past four years has certainly taught everyone to be ready for anything.

Learn more about Adam Button by visiting ForexLive.com.