FX Market Update: Chinese Yuan Surge Gains Steam

US dollar index crash continues

The US dollar index (DXY) continued falling as odds of more Federal Reserve interest rate cuts continued.

Data released last week showed that the US consumer confidence dropped by the biggest margin in over three years in September.

Another report by the S&P Global showed that the manufacturing PMI remained below 50 this month, meaning that the industry is contracting.

Most importantly, the US Personal Consumption Expenditure (PCE) figure continued falling in August. Therefore, with the labor market going through a difficult period, there are signs that the Fed will continue cutting interest rates in the next two meetings of the year.

The key catalyst for the US dollar this week will be the upcoming non-farm payroll (NFP) data, which will provide more color about the labor market. A weak jobs report will point to more aggressive cuts by the Fed, which will lead to more US dollar sell-off.

Chinese yuan rally accelerates

The Chinese yuan continued surging against the US dollar and other currencies. The USD/CNY exchange rate dropped to a low of 7.010, its lowest point since May last year. It has dropped by more than 3.76% from its highest level this year.

The currency rebounded because of last week’s actions by the government and the People’s Bank of China (PBoC). In a statement on Tuesday, the central bank lowered some of the bank reserve requirements, a move that will unlock over $100 billion in cash.

At the same time, the government announced a series of stimulus that will add over $140 billion in cash.

These actions led many analysts to believe that the Chinese economy will bounce back and achieve its 5% target this year.

Japanese yen’s volatility continues

The Japanese yen has strengthened by over 12% from its lowest level this year. It rebounded on Friday after the country’s labor party voted for Shigeru Ishiba to be the next leader. He will then become the next Japan’s Prime Minister on Tuesday.

Analysts are a bit cautious about Ishiba, who has embraced a hawkish tone against China. He also supports higher taxes on companies and investment income. Also, unlike other LDP candidates, he has also supported the Bank of Japan’s (BoJ) normalization policies.

The election came a week after the BoJ left interest rates unchanged and hinted that rate hikes may resume if inflation remains steady. In a note, ING analysts wrote:

The BoJ unanimously decided to keep its policy rate unchanged at 0.25%. Amid growing confidence in achieving its sustainable inflation target, the BoJ will closely watch the impact of FX movements on inflation. The timing of the next hike remains uncertain, but we see a chance of a hike in December.

ING Analysts

Euro holds steady as ECB rate cuts odds rise

The euro continued rising and is hovering at its highest point since July 18 last year. The EUR/USD pair rose by over 5.26% from the lowest point in 2024.

This price action happened after the ECB and the Fed slashed interest rates in their recent meetings.

Additional data released last week showed that the manufacturing and services PMIs continued falling in September. Also, there are signs that the bloc’s inflation continued falling this month. The headline CPI in France and Spain dropped to below 2%, meaning that the ECB has room to cut interest rates in the coming meetings.

A survey published by the Financial Times showed that most analysts expect the bank to cut rates in October. Before these numbers, the view was that the ECB would slash rates in December. In a note, a Deutsche Bank analyst said:

I expect the ECB to move its focus from inflation to growth risks. The data was simply too weak to not change the October meeting outlook.

Deutsche Bank

Canadian dollar rally fades

The Canadian dollar has been in a strong bullish trend in the past few weeks even as the Bank of Canada (BoC) turned a highly dovish. It has delivered several interest rate cuts in the past few months.

The USD/CAD exchange rate fell from 1.3946 in August to a low of 1.3422 on Sep. 25. It then bounced back to 1.3515 as the price of crude oil continued falling. Brent, the global benchmark, fell to $71.5 and $68, respectively.

The Canadian dollar is often highly correlated with crude oil because of the vast amount it ships internationally. There is an increasing risk that oil prices will continue falling in the near term now that Saudi Arabia has abandoned its $100 price goal.

Israeli shekel steady amid geopolitical risks

The Israeli shekel has done well in the past few months even as the war in the region escalated. After peaking at 4.085 in 2023, the USD/ILS exchange rate has dropped to 3.6875. It has fallen by over 4.2% from its highest point this year.

There is a risk that the Israeli shekel will retreat as the ongoing strikes on Lebanon continued. On Saturday, Israel continued its campaign, killing the head of Hezbollah, risking a wider crisis in the region.

South African rand surge continues

The USD/ZAR exchange rate continued falling last week as it crashed to a low of 17.06, its lowest point since February 2023. It has dropped by more than 14% from its highest point in 2023.

The South African rand has been in a strong bull run after the ANC and the Democratic Alliance formed an alliance after the election. This deal has led to more stability and credit rating upgrades, leading to a strong rand.