Dollar drops on reports China rethinks US debt purchases

The dollar, US bond prices and stock index futures all tumbled as safe haven gold and yen jumped on the back of a report that China is considering reducing or halting its purchase of US government debt.  Bloomberg reported that "officials reviewing China’s FX holdings have recommended slowing or halting purchases of US Treasuries, according to people familiar with the matter." Although this is yet to be confirmed, speculators took no chances and sold the dollar as China – along with Japan – are the biggest foreign holders of US debt. Thus any decisions to reduce their holdings of US debt could have significant consequences on Treasuries, and in turn the dollar. Apparently, the Chinese consider US government bonds to have become less attractive compared to other assets.

US CPI and retail sales could provide further volatility for USD

The dollar will remain in focus this week ahead of the release of US CPI and retail sales on Friday. So far, the greenback has shrugged off positive developments in the US as the market’s expectations about future Fed rate hikes are well anchored, at a time when other key central banks are slowly turning hawkish, too. Thus for the dollar to change its course we will either need to see a notable and sustainable improvement in US macro data, or a significant deterioration in economic data elsewhere to discourage the likes of the ECB and BoE from tightening their monetary policies. Otherwise, the dollar may remain largely out of favour, which may actually be good news for buck-denominated gold and other safe haven assets.

Pressure mounts on USD/JPY

Today’s news out of China helped to push the already under-pressure USD/JPY further lower. The yen has rallied sharply this week after the Bank of Japan trimmed the amount of long-dated Japanese government bonds it buys. As a result of the dollar’s ongoing weakness and yen’s renewed  strength, not to mention the slight risk-off tone in the stock markets, the USD/JPY has broken below key support at 112, a level which could turn into resistance upon a potential re-test. As things stand, it looks likely that the USD/JPY will go on to break down below the next area of support around the 110.85-111.00 range. If so, the bears may then aim for the Fibonacci retracement levels at 110.15 (61.8%) and 108.90 (78.6%) as their next objectives. Meanwhile any move back above this year’s opening price level of 112.68 would probably mark the end of the near-term downward trend. In this potential scenario, the USD/JPY could head towards 114s or 115s again.