USD/CNH ANALYSIS
- PBoC holds MLF rate.
- Overextended CNH may be in for pullback.
YUAN FUNDAMENTAL BACKDROP
The Chinese Yuan (offshore) opened the trading day weaker against the US dollar with rising COVID-19 cases impacting on the country’s growth outlook. China’s strict controls regarding COVID-19 protocols has proved to be quite stifling on the economy while the upcoming Federal Reserve rates decision is pulling capital from the Chinese stock market in expectation of higher interest rates (25bps) in the US, and could be exacerbated by the PBoC’s policy divergence from the Fed.
Geopolitics have yet to hurt the Chinese economy in a comparative sense to other major nations showing its resilience to global supply shocks. Knock-on effects particularly around sanctions that may present themselves should China come to Russia’s aid, may add additional strain to the economy leaving the Yuan exposed to downside risk.
CNH has been one of the standout performers against the USD year-to-date (see graphic below) amidst a rallying greenback post-invasion.
Source: Reuters
The Yuan has since let go of most of its 2022 gains but this morning’s economic data releases (see economic calendar below) saw CNH bulls find some bids. All three metrics surprised market expectations possibly pointing to strong GDP numbers to come. The Medium-term Lending Facility (MLF) was held steady today which disturbed many analysts but this could be a ‘wait-and-see- approach by the PBoC – as data from earlier rate cuts may be yet to reveal their impact. Later this month (21 March), the PBoC meets to decide on its policy interest rates where I foresee an additional cut to the lending benchmark loan prime rate (LPR).
TECHNICAL ANALYSIS
USD/CNH DAILY CHART
Chart prepared by Warren Venketas, IG
Markets temporarily stalled USD/CNH bulls at the 6.400 psychological handle after positive economic data prints from China. This could point to short-term strength for CNH before an additional push higher. Fundamentals are likely to result in CNH weakness against the USD medium/long-term but entering the market now looks to be poor in terms on levels.
Resistance levels:
- 6.4627
- 6.4300
- 6.4000
Support levels:
- 100-day EMA (yellow)
- 6.3500
Contact and follow Warren on Twitter: @WVenketas
