The USD found strong support on May 14, mostly credited to US trade secretary Ross announcing that the US stance on China’s ZTE has changed, Head of FX Strategy / Saxo Bank John Hardy told Trend on May 16.
"There are multiple angles on ZTE (it got into hot water in the first place for trading with Iran, but is also a big buyer of US telco components), but the general impression here is one of a back-pedal from the US side on trade tensions as the market tries to figure out how large the discount on Trump’s trade stance should be from here in what is a critical period for US-China relations. Another excuse for the move is that EURUSD came within a pip or two of 1.2000 in EURUSD, an obvious psychological resistance point," he said.
Higher US yields are also an important support for the USD rebound, as the entire yield curve lifted again and the US 10-year benchmark yield pulled back above 3.00%, according to him.
"Only the third time it has closed clear of that level for the cycle, and this time it looks ready to challenge the 6-year high just above 3.05%. A close above that level would be the first 6-year high since 1981, " he said.
"The USD rebound and pull higher in US yields is seeing fresh fallout in EM currencies as well, as the Argentine peso was pushed sharply lower again (trading near 25 at the end of yesterday versus 22 last week. And the Turkish lira was taken to new lows versus the USD as well as President Erdogan indicated in an interview that he will take more forceful charge of interest rate policy once he is elected president in June. He made the tone deaf pronouncement that he would cut interest rates because lower rates will mean lower inflation – which isn’t how it works for EMs at risk of a negative spiral from excessive external debt. Stay tuned as contagion risks for externally vulnerable EMs could pick up if a country the size of Turkey is seen at risk of eventual default, " Hardy said.
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