The Rebound of USD as China Dives Down!
ACY Securities - Luca Santos
The US dollar (USD) has staged a modest recovery following last week’s pronounced sell-off. After reaching a low of 106.970 on Friday, the dollar index rebounded to 107.778 overnight/opening of today.
DXY 15minutes
The recent depreciation of the dollar was driven by diminished concerns over potential disruptions to global trade stemming from President Trump’s tariff policies. Notably, Trump’s remarks about delaying a proposed 10% tariff hike on Chinese imports fuelled optimism among investors, resulting in a temporary strengthening of the Chinese renminbi (CNY). However, this sentiment was tempered as weaker-than-expected Chinese Purchasing Managers’ Index (PMI) data surfaced over the weekend.
USDCNH
The January PMI figures revealed a slowdown in China’s economic activity, with the manufacturing index dropping to 49.1—the lowest since August—and the services index declining to 50.2.
China PMI Releases
This unexpected weakness, coinciding with the Lunar New Year period, signals broader challenges in China’s growth trajectory. I’m anticipating that domestic policymakers will implement additional fiscal and monetary stimulus post-holiday to counter these headwinds. Should the US proceed with further tariff measures, the pressure on China’s economy and its currency could intensify, potentially driving the USD/CNY pair closer to 7.5000 as projected.
Meanwhile, the geopolitical spotlight also turned to Colombia, where President Trump’s imposition of tariffs and sanctions aimed at resolving a diplomatic dispute demonstrated the administration’s aggressive trade stance. While the measures were ultimately retracted following swift compliance from Colombian authorities, this episode underscores Trump’s willingness to leverage tariffs as a negotiation tool, heightening uncertainty for emerging market currencies such as the Mexican peso and South African rand.
On the monetary policy front, attention shifts to this week’s central bank updates, particularly from the Federal Reserve (Fed), European Central Bank (ECB), and Bank of Canada (BoC). The Fed’s December meeting hinted at a pause in rate adjustments, marking the end of three consecutive cuts. While market expectations suggest a longer pause, with the next rate cut likely deferred to May or June, any indication of an earlier adjustment—potentially in March—could pose a downside risk to the USD. Conversely, policy divergence remains a key factor underpinning dollar strength, as other central banks, including the ECB and the People’s Bank of China (PBoC), are more likely to ease further.
CME FedWatch Tool
In summary, the USD’s recent performance reflects a complex interplay of geopolitical developments, economic data, and monetary policy expectations. The dollar’s resilience amid global uncertainties highlights its enduring appeal as a safe-haven asset, although risks from evolving trade policies and central bank decisions remain pivotal to its trajectory in the coming weeks.
This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.
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