The unexpected strengthening of the Chinese yuan has become the most discussed event of the day in the foreign exchange market. The USD/CNY pair rose to a 17-month high and manages to maintain until today. For six trading days, the price fluctuated in a 4-point range, ignoring all fundamental factors. Note that the exchange market in China was closed for a week due to the country's celebration of its founding day. And as soon as the yuan "came into play", it strengthened against the dollar to the level of 6.705. The last time the pair was in this price area was in the spring of last year, so such a large-scale and sharp strengthening of the yuan surprised the market.
Although the reason for the strengthening of the Chinese currency is obvious, there is growing confidence in the market that Joe Biden will win the US presidential election. This fact reinforces traders' hopes for better China-US relations. Representatives of the Democratic Party also criticize China and have no fewer complaints against it than the Republicans. And yet, if we compare the options for Trump's re-election and the Biden's presidency from the point of view of the prospects for the development of a trade war, then here the priority is for a democrat.
On the one hand, miracles should not be expected: American policy towards China will not change depending on who wins the November elections - the tightening of anti-Chinese rhetoric began under Obama. On the other hand, the former vice president previously called the trade war launched by Trump "suicidal." Biden is unlikely to pursue an equally tough policy towards China. Moreover, even as part of the election campaign, he does not declare such intentions (after all, in that case, he would play on Trump's side). That is, with a high degree of probability, it can be assumed that all the additional duties introduced will be retained, but at the same time, as part of the discussion of the second phase of the trade deal, Washington will abandon some of its requirements and / or will make a more significant compromise.
That is why the yuan renewed its one and a half year maximum. After all, while China celebrated a national holiday, the latest polls were published in the States, which indicates the strengthening of Biden's position. So, since September, the Democratic leader has doubled the gap from Trump. This is evidenced by the data of a poll conducted by Fox News which showed that 53% of respondents are ready to vote for Biden (in September this figure was at the level of 51%), while 43% voted for Trump (which was 46% in September). In other words, in just a month the gap increased from 5% to 10%. Note that there are just over three weeks left before the elections.
Of course, it is also necessary to take into account the specifics of the US electoral system. To become president, a candidate must win enough states to win the Electoral College. For a long time, "local" polls have shown that Trump was almost as popular as Biden in the most competitive states. But recent data suggests otherwise. In particular, a Reuters poll (which was conducted by IPSOS forces) suggests that Biden is ahead of Trump in five states - Wisconsin, Pennsylvania, Michigan, Florida, and Arizona. These states, according to Reuters journalists, will play a decisive role in determining the winner. By the way, the mathematical model of The Economist magazine predicts Biden's victory with a probability of 85%.
Considering such news flow, a natural question arises: why then the dollar index has been steadily declining for the second week? There are different opinions about this, but in my opinion, the key problem is the upcoming political turbulence. Investors fear that Trump will disagree with the election results (which this time will be held by mail) and a political crisis will arise in the country. Trump repeats with his usual persistence the mantra that he is ahead of his rival, while "fake media spread fake ratings." Whether he will call the election results (not in his favor) a "fake" is an open question. Knowing Trump's impulsiveness and unpredictability, traders are wary of the US dollar, especially now that Biden's victory is becoming more obvious.
Speaking directly about the euro-dollar pair, we see that buyers were able to gain a foothold above the resistance level of 1.1750 (the middle line of the Bollinger Bands coinciding with the Kijun-sen line on the daily chart). Given the general weakening of the greenback, the EUR/USD bulls have every chance of testing the next resistance level, which is located at 1.1880 (the upper border of the Kumo cloud, coinciding with the Kijun-sen line).
