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USD/CNY gains unlikely to go on despite coronavirus fears

While the pair’s sudden surge caught many by surprise, the greenback is facing several headwinds that could put an end to its current run.

Source: Bloomberg

The USD/CNH pair is currently trading near a two-week high of 6.92910, after posting its biggest single-day rally since 13 December 2019.

A surprising surge

This surprised many analysts, including those at UOB, who wrote in a note posted today:

‘We highlighted yesterday (21 Jan, spot at 6.8700) that the decline in USD “is in oversold territory” but held the view that it “could dip below 6.8400 but the July 2019 low near 6.8170 is likely out of reach”.

The manner by which the USD subsequently surged to a high of 6.9126 came as a surprise. While our “strong resistance” at 6.9200 is still intact, the outsized gain is enough to indicate that USD has found a short-term bottom at 6.8460 on Monday (20 Jan).’

Prospect of sustained rise ‘not high’

The note went on add that the current USD strength is in the ‘early stage of a correction phase’, which could see it recover to 6.9650 against the yuan.

Any progression beyond this level is unlikely at this early stage, with the prospect of a sustained rise above 6.9650 ‘not high’.

On the downside, however, support is at 6.8800, but only a move below 6.8650 would suggest the correction phase has ended, UOB concluded.

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Lack of volatility a bane to USD

DailyFX analyst Rich Dvorak also noted that headwinds rooted in the US-China trade deal signing last week could also limit the greenback’s current surge, with global currency volatility back at historic lows amid upbeat market sentiment – according to a JPMorgan index.

‘The USD could soon come under pressure relative to other major currency pairs once more, with risk appetite bulging and volatility remaining suppressed,’ he wrote.

He further concurred that the fundamental outlook for the greenback remains ‘unfavourable’, with the US Federal Reserve also planning ‘to keep inflating its balance sheet while markets grow frothy in light of an absence of volatility’.

Wuhan coronavirus also dampening the yuan

FX watchers also said that part of the gain had come on the back of a weakening Chinese yuan resulting from ongoing market trepidation surrounding the Wuhan coronavirus.

It is still unclear how much impact the virus outbreak is having on the USD/CNH, but the forex minor had been trading flatly just prior to this latest hike. It has elevated 0.4% since 1.30 UTC on 23 January, and continues to ascend as at press time.

Asia indices, including the Straits Times Index, had also descended following news of the virus earlier this week.

According to UOB, market attention will continue to be on the spread of the Wuhan coronavirus, which has killed at least 17 people and sickened nearly 600 people globally at last count.

The World Health Organization (WHO) held an emergency meeting in Geneva, Switzerland on Wednesday, but postponed the decision on declaring the latest coronavirus as a global health emergency, citing the need for more information.

The WHO committee is scheduled to meet again later today.

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