CNH: USD/CNH Back Above 7.2400 On Broader USD Gains, Trade Data Today

FX volatility is accelerating higher, the 2 main themes driving this are the dislocations in US yields with Treasuries moving  from 3.87% to 4.30% in just 2 days. Secondly the break above 7.38/40 in USD/CNH could be the first sign of the PBOC signaling it is about to allow the currency to be devalued in response to the tariffs.

• The overnight range was 0.5521 - 0.5626, Asia opens near the lows once more as stocks fail to hold onto their gains and US yields have another leg higher.
• The RBNZ is expected to lower its key rate 25bp to 3.5% today. The market is starting to think they might need to do more as trade tensions threaten the economy.
• The break higher in USD/CNH is of profound importance, the Fix will be keenly watched today to get confirmation that the PBOC is willing to let the currency run higher. 
• A run higher in USD/CNH will provide strong headwinds for both the AUD and NZD and increase the already heightened selling pressure.
• Technically the NZD continues to hold the 0.5500 support area, but price continues to trade heavy just above it. A break of this support could see the move lower accelerate. 
• The CFTC data shows both leverage funds and Asset managers are running historically large short positions, if this level breaks expect these to be added to.
• On the day expect sellers to participate in any bounce back towards 0.5600/50. All eyes though will be watching the key 0.5500 area for signs it might give way.

NZDUSD

Source: MNI - Market News/Bloomberg

• When it comes to core goods more broadly, we’re mindful here of the rapid increase in reported manufactured input costs per various business surveys.
• The ISM manufacturing survey for March followed cues from the regional Fed surveys with its 69.4 prices paid reading at its highest since Jun 2022 (and +14.5pts since President Trump’s inauguration in January).
• Separately, the MNI Chicago PMI prices paid component only retreated 0.4pts in March having in February seen its sharpest monthly increase since July 1957 for its highest level since August 2022.
• Fed Governor Kugler, when speaking on Mar 25, called an apparent end of goods price disinflation as an "unhelpful" development as this category that "has often kept a lid on total inflation and also affects inflation expectations... I am paying close attention to the acceleration of price increases and higher inflation expectations, especially given the recent bout of inflation in the past two years".
• It followed Fed Chair Powell at the Mar 19 FOMC press conference, who whilst sounding fairly optimistic on the inflation outlook, interestingly specifically noted that recent inflation readings now showed more goods-driven inflation ("we have had two very strong goods inflation readings in the last two months which is very unexpected", noting that tariffs likely played a factor). 

• Analysts perhaps surprisingly look for a moderation in core goods inflation to circa 0.1% M/M after February saw a modest upside surprise with 0.22% M/M (0.16% expected) following 0.28% in Jan (strongest since May 2023).
• February’s strength was helped by used cars prices rising 0.9% M/M - a category expected to fall moderately in March - whilst core goods ex used cars increased 0.12% M/M.
• Core goods ex used cars prices increased a rounded 0.1% M/M in three of the six months up to February, already a reasonable ‘acceleration’ from the near flat readings averaged in both 2024 (with 7 of 12 months seeing declines on an unrounded basis) and pre-pandemic.
• Around 20% of US apparel imports are from China, with analysts expecting a moderation to 0.3% M/M after 0.6% M/M. It’s a noisy category and so should be taken with caution but we’ll nevertheless watch it closely.