Bullish USD/CNH on Approaching Trade Talks And Technical Bullish Reversal
Key Points on USD/CNH Bullish Trade:
Entry Zone: 6.3116
Invalidation Point: 6.305
Target 1: 6.4000
Target 2: The 12-month average at 6.5742 or hold with trailing stop at Ichimoku Kijun-Sen (26-day midpoint)
Cue the Yuan puns as the trade talks get underway between China and the US. My flavor of the month is, ‘Yuan way or another’ the Yuan will weaken. China looks to be setting the stage for a weaker currency to help them yield to any tough demands by US President Trump. At the same time, the US Dollar Index is moving to the highest levels of 2018 after a breath-taking reversal from a 15.5-month downtrend.
The evidence is building that the Yuan could continue to weaken and the chart patterns are favoring a further upside move. On Wednesday, PBOC set the reference level of CNH to 6.367, which is the lowest level since January.
Naturally, given that the trade war will be easier to navigate with a weaker currency, we could continue to see the PBOC weaken the fixing to keep the trade-weighted index stable amid a surging US Dollar.
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What’s also important for traders to consider is the capacity for the PBOC to weaken ahead of and through the Mnuchin-led delegation in China. The capacity comes from the Yuan trading near 2-year highs on its own China Foreign Exchange Trading System (CFETS) basket that China recently introduced.
The US Dollar pared gains after the Federal Reserve stayed-the-course by keeping rates unchanged while willing to allow an overshoot of inflation. Such a pull-back may provide an opportunity to enter in the direction of the breakout with a better risk: reward profile.
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USD/CNH chart with resistance outlined:
Chart Source: Pro Real Time, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
The chart above indicates a breakout that is approaching with the Ichimoku lagging line (bright green) close to above the cloud that acts as resistance in a downtrend. If the lagging line breaks above the cloud, then the context for the broader market is full bullish with the burden of proof on price bears.
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The invalidation point on the chart is the Ichimoku cloud that now acts as supportfor the likely move higher with targets over the coming week and months at 6.4 and 6.5742.
Standard Deviations on the 12-month USDCNH Range
Data source: Bloomberg
This chart above shows the 1-and 2-standard deviation moves higher and lower from the 12-month average price. The 12-month average is 6.5742, and the price recently failed to hit the second lower standard deviation and is now reversing higher. Given the broad backdrop that looks to support a higher US Dollar, it seems like a safe trade to anticipate a move to the average before a move to the 2nd lower standard deviation band of the 12-month average.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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