- Spot: 6.8352 CNH per USD
- Entry Zone: Break and close below 6.806 CNH per USD
- Invalidation Point: 6.956 CNH per USD
- Target 1: 6.66 CNH per USD (Macro opening range low – H2 2018)
- Target 2: The 12-month average at 6.512 or hold with trailing stop above Ichimoku Kijun-Sen (26-day midpoint)
Did We Just Witness A Significant Pivot in USD/CNH?
Was that the top in USD/CNH? Traders should not make a living or hobby out of calling major reversals in a market, but when a combination of developments arise that signals the tides may be turning, they also shouldn’t have their head in the sand.
While many people were looking to the sell-off in the Turkish Lira and the South African Rand, the turn around on a development with the funding market in China may turn out to be the real story. In short, the cost to short the Yuan jumped to the highest level since 2016 and early 2017.
With China increasing the cost to borrow the Yuan, a key vehicle to short the currency while restricting Chinese bank’s ability to lend yuan off-shore, traders may be wondering if we’ll see a seven-handle on the USD/CNH anytime in the near future or later. Especially with US Dollar long positions by institutions already stretched.
Adding to the narrative, unsurprisingly on Monday was US President Donald Trump, who had a few words of disappointment for Fed Chairman Jerome Powell ahead of his keynote speech at Jackson Hole on Friday. The following headlines hit my terminal, which aligned with downside pressure on USD/CNH:
*TRUMP SAYS CHINA, EUROPE MANIPULATING CURRENCIES: REUTERS
*TRUMP SAYS 'I SHOULD BE GIVEN SOME HELP BY THE FED': REUTERS
This is not the first time Trump has lambasted the Fed for hiking in the face of his fiscal goals, but it may be enough to shift the confidence from USD bulls hoping for another leg higher in China. That combined with the biggest jump in 12-month CNH forwards in seven years may prove that the near future in USD/CNH may look much different from its past.
Global Traders Witnessed a Large Jump in CNH Forwards on Thursday
Data source: Bloomberg
Another data point (not pictured) worth discussing is the narrowing yield spread between Chinese and US Treasury 10-year yields. The spot price of USD/CNH rose as the spread between Chinese bonds widened to US yields, but as those yields tighten as they have since Thursday, that could also exert downward pressure on the pair.
Looking to the Price Charts USD/CNH - Massive Bearish Divergence
Chart Source: Pro Real Time, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
The chart above indicates bearish momentum per MACD into major resistance. The resistance range (yellow) was the price range of the week in January 2017 when USD/CNH topped below 7. Coincidentally, that was the last time the PBOC stepped in to dissuade the bears from shorting CNH further.
The MACD momentum picture should give traders pause who are long USD/CNH. The bearish divergence aligns with Ichimoku to show price moving below support of the 26-day midpoint. That tends to mean the short-term bullish trend is over as we’re trading below the close of 26-days ago.
The next crack to the bull’s world will be a move of the lagging line (bright green on the chart above) below the price from 26-days ago near 6.767 CNH per USD. Lastly, per Ichimoku, a break below the cloud could argue that we’re about to see another breakdown similar to the 2017 in DXY.
Want a full (& FREE) guide to walk you through Ichimoku? I created one here
The invalidation point on the chart is the high before the PBoC jacked up the cost to short the Yuan last week at 6.956 CNH per USD. With record long USD institutional positions, the China-US yield spread beginning to favor the yuan, a dramatic steepening of the USD/CNH forward curve similar to prior tops in the pair the invalidation level may not be traded at for some time.
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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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