China's slowdown intensifies. We buy the dip in USDCNY

At the recent FOMC meeting, Chair Powell signalled that follow up 50bp rate hikes were likely at the June and July meetings. This means we are now just four weeks away from the Fed’s next 50 bp hike and two weeks away from the start of QT.

As viewed last week, US dollar strength has not only been about the expectations around the Fed’s aggressive rate-hiking cycle. The anti-cyclical U.S dollar has gained support as the slowdown in the Eurozone and China has become more concerning.

Woeful Chinese activity data released today has only fuelled China's slowdown concerns, following Chinese authorities’ dogmatic pursuit of a "Covid-zero" strategy on top of lingering headwinds from last year's regulatory reset.

After today’s soft activity data, a GDP print in the mid 3’s is possible for 2022, well below policymakers 5.5% target and less than half of last year's 8.1% growth rate.

To ease growth concerns, the National Bureau of Statistics released a statement today that "The impact of COVID 19 was temporary, and the economy was expected to stabilise and recover."

However, the price action in USDCNY told the real story. USDCNY rallied back above 6.8000, 7% higher than the 6.4000 level it was trading at just under one month ago.

Because Covid lockdowns erode the effectiveness of policy easing, the only effective lever for Chinese policymakers to pull currently is to let the CNY fall.

As such, we like buying USDCNY. However, as the rally is now overbought the preference is to buy dips back to 6.70, with a stop loss placed at 6.57. The target is a move to 6.95.

Source Tradingview. The figures stated are as of May 16th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.