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Weekly FX Commentary June 01, 2021: Biden’s 6 trillion budget proposal further weakens the USD

Biden’s 6 trillion budget proposal further weakens the USD

Yesterday, People’s Bank of China (PBoC) raised the reserve ratio requirement for foreign exchange from 5% to 7% in an attempt to curb the yuan’s appreciation. Although this will reduce the supply of US dollars and other foreign currencies onshore China such as EUR & JPY, it is unlikely to have a lasting impact on the ongoing USDRMB bearish trend, which is underpinned by long-term, structural reasons (read more about this here). Yet, PBoC’s decision may have a supportive effect on other reserve currencies, such as the Euro, the British pound, and the Japanese yen.

Last week, The New York Times announced that President Biden will propose a USD 6 trillion budget, which would represent the US’ largest federal spending since World War II. Although the final budget remains subject to approval by the US Congress, which might revise down the figure, this mega US dollar printing is creating a downside risk for the US dollar. Biden will need a cheap dollar to sell more US Treasuries to the country’s main creditors, in particular China, Japan, and Europe. It will also put him in a position where it will be difficult not to compromise on the economic sanctions and import taxes imposed by Trump on China and Europe. We thus believe RMB and EUR are likely to further strengthen against the USD in the coming months.

As such, companies sourcing or manufacturing in China or in Europe with revenue in US dollars or USD-pegged Hong Kong dollars are at risk of seeing their profit margin eaten away by a declining USD versus RMB and EUR, unless this risk is properly hedged.

The week ahead

US May nonfarm payrolls will be announced on Friday (consensus: +650k MoM; vs previous: +266k), while China’s trade surplus in May will be announced next Monday (previous: US$42.9bn). Any significant upside surprise would support the two countries’ respective currency.