MIG Forex Research

Market News Services are reporting that a Chinese official has raised concerns about the current path of the US Dollar. With the dollar and Yuan been effectively fixed since the middle of last year around the 6.83 mark, the unnamed official with links to SAFE suggested the Chinese wanted a stronger dollar from here to help curtail heavy losses on existing USD demoniated reserve holdings and to nip in the bud potential inflation of even stagflation going forward.

The demise of the dollar and, with it, the cheapening of Chinese exports relative to many of it's trading partners risks putting us back exactly whence we came with widening and potentially unsustainable trade balances.

If the unnamed official's views are shared by SAFE, it will be interesting to see what action they could possibly take in the market - especially with around 66% of their reserve holdings being USD denominated already. The SDR basket lets not forget has a 44% USD weighting, so a long-term strategy to buy the dollar looks very unlikely. However a short-term shot across the bows can't be ruled out. With the likes of NZDUSD having rallied 53% since March and 21% over the past 3 months alone, any decision by China to attempt to support the dollar could engender a violent reverse of USD shorts. From a DeMark perspective, there are many weekly counts that have completed recently that make me extremely wary of the short dollar trade at present.