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USD/CNH: Yuan Rallies on US-China Trade Deal Hopes – Will it Last?

USD/CNH: Yuan Rallies on US-China Trade Deal Hopes – Will it Last?

Rich Dvorak, Analyst

USD/CNH: CHINESE YUAN RALLY COULD REVERSE AS US-CHINA TRADE WAR PROGRESS STALLS

  • The Chinese Yuan has climbed over 1% against the US Dollar since last week as President Trump touts ‘phase 1’ trade agreement with China after talks with Vice Premier Liu He
  • USD/CNH could quickly pivot back higher if trade negotiators backpedal on recent concessions and the recent trade war ceasefire proves short-lived
  • Check out our interactive Trade War Timeline for a brief history of trade wars and their effects on financial markets

Spot USD/CNH price action has drifted lower to its weakest reading since September 15 as the Chinese Yuan rallies in response to recent trade progress – coined a Phase 1 Trade Agreement – made between the US and China. The agreement made between Sino-American negotiators detailed a large agricultural purchase by the Chinese in exchange for the US’ removal of a 5% tariff tranche on $250 billion of goods imported from China originally set to go into effect on October 15. With the prospect of lower tariffs, the offshore Yuan has climbed while fears of PBoC currency devaluation aimed at offsetting the economic impact of tariffs on the country’s exports recedes.

Gestures of goodwill” by both sides has led to the latest trade war breakthrough, although deal enforcement still needs to be worked out while the formal agreement has yet to be put into writing. Moreover, commentary from Chinese officials from over the weekend indicated that the two sides have made “substantial progress” but did not make any mention of a deal or agreement. Also, the White House has refused to commit to removing another trance of tariffs on Chinese goods slated for December, which China will likely want removed before signing any formal agreement.

USD/CNH PRICE CHART: WEEKLY TIME FRAME (FEBRUARY 11, 2018 TO OCTOBER 14, 2019)

USD/CNH Chinese Yuan Price Chart Trade Talks Phase 1 Agreement

Additionally, more difficult points of discussion like intellectual property rights, Huawei and entity blacklist among other issues remain unresolved. Consequently, the recent rally in the Chinese Yuan could prove short lived as it has previously since the US-China trade war first began. That said, the prevailing uptrend in spot USD/CNH comes into focus when looking at the currency pair’s weekly price chart. Since the Chinese Yuan breached back below the 7.1000 handle the next major technical area is highlighted by the ‘taboo’ 7.0000 price level near confluent support provided by the 23.6% Fibonacci retracement of USD/CNH’s trading range since April 2018.

USD/CNH PRICE CHART: DAILY TIME FRAME (APRIL 16, 2019 TO OCTOBER 14, 2019)

USD/CNH: Yuan Rallies on US-China Trade Deal Hopes – Will it Last?

Nevertheless, it is rumored that President Trump and President Xi could potentially sign a formal trade deal November 16-17 at the APEC conference in Santiago, Chile. Recent history indicates that skepticism of follow-through is warranted, however. Rewinding a few months back to the Trump-Xi G20 Summit meeting in Osaka, Japan which yielded a trade war ceasefire reveals that the truce was short-lived. In fact, President Trump announced he would levy another tranche of tariffs on Chinese goods a month later.

As such, there is a material risk that the latest stretch of progress made between the US and China fails to materialize into a tangible deal that ultimately ratchets down the trade war. Correspondingly, the recent rally in the Chinese Yuan may prove to be short-lived – especially considering that the prospect of more tariffs (Trump’s biggest bargaining chip in the trade war) is still a major possibility down the road.

Read more: Chinese Yuan, PBoC Fixing Likely to Serve as US-China Trade War Barometer

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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