Synopsis:

ING reports a shift in the People’s Bank of China's (PBOC) stance on the renminbi (CNY), suggesting a growing ease with allowing gradual depreciation of the currency. This comes amid continued strength in the USD, influenced by recent Federal Reserve communications and market dynamics, positioning the dollar for potential further gains.

Key Points:

• PBOC Fixing and CNY Movement: The PBOC set the USD/CNY fixing nearly unchanged from the previous day at 7.1025, suggesting a controlled approach to managing the renminbi's value. Despite this, USD/CNY and USD/CNH have shown movements that indicate a trend towards a weaker CNY, with USD/CNY trading at 7.2400 and USD/CNH just below 7.2600.

• Trade-Weighted Renminbi Strength: Despite the nominal depreciation against the USD, the renminbi has strengthened on a trade-weighted basis due to the broader decline in the currencies of China's trading partners. This dynamic, coupled with China's soft inflation and export figures, supports the PBOC’s comfort with a gradual weakening of the CNY.

• U.S. Monetary Policy Influence: Recent comments from Federal Reserve Chair Jay Powell and Vice Chair Philip Jefferson have highlighted slower progress on inflation control, hinting at potential delays in rate cuts. This has bolstered the USD, with 2-year Treasury yields touching 5.0%, a level not seen since November.

• Impact on U.S. Equities and DXY: The strengthening dollar and high Treasury yields pose challenges for U.S. equities, potentially leading to a sell-off that could further enhance the dollar's position. The Dollar Index (DXY) is now eyeing the 107.00 mark, reflecting October highs.

Conclusion:

The combination of PBOC’s management of the CNY and the U.S. Federal Reserve’s signals on monetary policy are contributing to a stronger USD environment. ING notes that the risks remain tilted towards further dollar gains, with potential impacts across global financial markets. Investors should closely monitor these developments, as they hold significant implications for currency valuations and international trade dynamics.