The Renminbi (RMB) is getting caught in a new US-China political entanglement as the White House’s China hawks, who have Trump’s ear, are seizing the moment.

Smaller spats are emerging between China and Australia, China and Germany, and even China and Japan, so Donald Trump is talking tariffs again though he often says many things that do not always come true.

But given the moves in copper and Yuan (CNH) on Friday, it seems like the market is tentatively trying to price in the next phase of this economic calamity as the US government starts internal debate on Chinese reparations and retaliation.

G-10 currencies: The Australian Dollar

Australian dollar volumes were much higher on Friday with AUDUSD trading about 100 pips lower from Thursday’s highs along with US equity futures down 2% on the day. Indeed, a double whammy of toxicity for the Aussie. And again, this morning, the A$ has opened a touch lower.

Interest in AUD downside has been quick to resurface, which mostly focused on the spot out to the one month, but this could stretch out along the curve tangentially as the level of the political imbroglio rises.

But also compounding the shift the A$ view is that the pace of China’s consumption has slowed and is steadying below trend levels. And with a good chunk of the world’s economies not consuming or buying made at home out of concern for domestic interests, it’s now debatable how much China can outperform. So it’s back to 3-5 day views on currency markets until global economies reopen, then the economic data becomes more meaningful.

The Euro

Peripheral spreads widened as the European Central Bank (ECB) announced no additional PEPP, disappointing some. The EUR came under pressure before strengthening on what looked like month-end rebalancing flows. The lack of retracement of the up move in the new month might indicate that the market was caught wrong-footed on bearish EUR positions.

In light of the price action in other asset classes over the last 72 hours, particularly sagging stock markets, one might see EURUSD running out of steam this week.

The ECB measures announced last week fell well short of containing sovereign risks in Europe and suggest we could see a resumption of the long-end spreads to widen back to pre-PEPP levels over the coming weeks. That could signal the EURUSD lower on spill-over risk effect.

The Yuan

We should expect the customary tweets from Global Times and other China bots slamming the USA, so this could be bi-directional for the greenback as it’s bipartisan for the US election risk and probably worth worrying about, as the US versus China blame game gathers a head of steam.

Although the Wuhan lab is under CIA scrutiny, the White House has yet to reveal a smoking gun. But if the lab is the epicentre of the accidental outbreak and a cover-up, China could find themselves backed into a corner quickly if evidence does point in that direction.

As far as the CNH, markets have reached a particularly delicate standstill as it relates to the virus narrative. And it is certainly not in China’s interests to encourage currency weakness as that would inflame the whole US cancelling China debt obligations argument. The 7.15 USDCNH level has been a keen inflexion point for local Yuan traders and the PBoC in the past, so eyes and ears will be trained on the key pivot level.

Petrol currencies: The Ringgit

Following a volatile rebalancing process in physical crude oil markets, the outlook on oil sensitive currencies has brightened a bit as we bore bare to the Ringgit rallying on Friday this despite a trade war like sell-off on the Yuan as risk rises in the east.

Norwegian Krone

The NOK is one of the Oil currency sensitive trades that could fly as the Oil market begins its arduous rebalancing acts. There’s bound to be an increased conviction in NOK outperformance. First, the currency stands to benefit from the shifting distribution of risks in the oil market. And the NOK also fits well into our cornea divergence trade as the country is relatively well-positioned to weather the COVID shock from both an internal and external point of view.

EM FX Asia Carry

Liquidity was inferior across the EM FX space on Friday, given the May Day holiday. But USD demand came back with a vengeance across the high yielders. Locally the focus remains on the Rupiah. The IDR has gone round trip coming into the year as one of the most favoured EM carry trade, to brutally selling in March amidst the sharp drawdown in EM assets and then rallying by almost 10% in the past month on the markets reach for carrying as the Fed hits the LBZ. But all eyes are on rising risk in the east.

Currency markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp