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Chinese Yuan, Canary in the Coal Mine? Setups in EUR/CNH, USD/CNH

Chinese Yuan, Canary in the Coal Mine? Setups in EUR/CNH, USD/CNH

Christopher Vecchio, CFA, Senior Strategist
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Chinese Yuan Outlook:

  • The turn in CNH-crosses in late-February harkened the tumble in equities.
  • EUR/CNH rates haven’t been climbing, and in fact are closing in on their yearly low. This is not behavior indicative of a true risk-off market.
  • Instead, it may be the case that rising US Treasury yields are still the most significant factor driving asset allocation decisions across asset classes, including within the EM FX space.

Chinese Yuan, Warning Signal?

The Chinese Yuan has had quite the interesting few weeks since the Spring Festival Golden Week. The turn in CNH-crosses in late-February harkened the tumble in global equities. Rising global bond yields, but US Treasury yields in particular, have contributed to the turbulence. To no surprise, the emerging markets currency space has been hit hard.

Yet, even as USD/CNH rates have broken out of their pandemic downtrend, EUR/CNH rates haven’t been climbing, and in fact are closing in on their yearly low. This is not behavior indicative of a true risk-off market.Instead, it may be the case that rising US Treasury yields are still the most significant factor driving asset allocation decisions across asset classes, including within the EM FX space.

This divergence may continue in the coming periods as global investors shift to more ‘growth’ sensitive assets; both CNH and USD are in a better position than EUR in that regard.

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USD/CNH Rate Technical Analysis: Daily Chart (March 2020 to March 2021) (Chart 1)

Chinese Yuan, Canary in the Coal Mine? Setups in EUR/CNH, USD/CNH

In the prior Chinese Yuan forecast update, it was noted that “a run higher to the 6.4970/6.5155 zone (support in December 2020, resistance in January 2021) can’t be ruled out, which necessarily means that the descending trendline from the May and November 2020 highs may soon be tested.” This area was breached, and the pandemic trendline was broken.

Momentum is now bullish after the push higher through the 6.4970/6.5155 zone. USD/CNH rates extending further above their daily 5-, 8-, 13-, and 21-EMA, which is in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics have risen into overbought territory. A short-term bottoming process may be developing. In the near-term, this may mean that USD/CNH could rally further to the 23.6% Fibonacci of the 2020 high/2021 low range at 6.5886 (which coincidentally served as resistance in late-November 2020).

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EUR/CNH Rate Technical Analysis: Daily Chart (March 2020 to March 2021) (Chart 2)

Chinese Yuan, Canary in the Coal Mine? Setups in EUR/CNH, USD/CNH

Like USD/CNH, EUR/CNH rates pushed higher at the end of February as anticipated: “having burst through the 61.8% retracement at 7.8459, EUR/CNH rates appear poised to continue to climb to their pandemic downtrend from the August and December 2020 highs, which could coincide with a return to the late-January swing high at 7.9088.” For a time on February 26, the pair moved above 7.9088 and the downtrend from the August and December 2020 highs – but it was short lived.

Unlike USD/CNH, instead of breaking their downtrend going back to its mid-summer high, EUR/CNH rates turned lower from the August and December 2020 downtrend, quickly returning back to their yearly low, which was momentarily breached at the end of last week. The pair is once more facing down significant support in the form of the 76.4% Fibonacci retracement of the 2020 low/high range at 7.7332.

Bearish momentum has accelerated, with the daily EMA envelope in full bearish sequential order. Daily Slow Stochastics are holding in oversold, while daily MACD is declining below its signal line. If, as noted previously, “gains through 7.9088 would warn that a deeper setback in risk appetite is setting in across global financial markets,” then a drop through 7.7332 would be an indication that risk appetite is improving – with some context.

Gains by USD/CNH alongside EUR/CNH losses speak to a further churn in asset allocation, one likely driving by a US-centric reflation trade, producing higher US yields, higher US equities, and a stronger US Dollar.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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