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USD/CNH Technical Analysis: Offshore Rate Posts Record Drop

USD/CNH Technical Analysis: Offshore Rate Posts Record Drop

Ilya Spivak,

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Talking Points:

  • USD/CNH Technical Strategy: Flat
  • Offshore Yuan Stages Sharp Recovery, Gains Most Since 2010 Against the US Dollar
  • Staying Flat as Policy Intervention Risk Threatens to Derail Technical Positioning

The US Dollar reversed sharply lower after hitting a five-year high against the Chinese Yuan, yielding the sharpest drop since the offshore CNH unit as introduced in 2010. Prices appear to be correcting having soared after the largest devaluation of the onshore exchange rate since August.

Near-term support is at 6.5368, the 50% Fibonacci retracement, with a break below that on a daily closing basis opening the door for a challenge of the 61.8% level at 6.4845. Alternatively, a reversal above support-turned-resistance at 6.5940, the August 12 high, clears the way for a test of the 23.6% Fib at 6.6538.

Entering short seems attractive from the technical and risk/reward perspectives. Tactically speaking however, recent Yuan volatility on the back of efforts to rein in equity market swings and devalue the exchange rate is worrisome. Most alarmingly, policymakers seem to have no problem with ad-hoc interventions without significant notice. This inherently undermines confidence in follow-through on technical positioning. As such, we will opt to stand aside.

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