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Chinese Yuan Technical Analysis: EUR/CNH, USD/CNH Rates Outlook

Chinese Yuan Technical Analysis: EUR/CNH, USD/CNH Rates Outlook

Christopher Vecchio, CFA, Senior Strategist

Chinese Yuan Outlook:

  • USD/CNH rates have tumbled towards their yearly low, and in the grand scheme of things, the rally seen at the start of 2021 may have been a brief setback before a deeper setback.
  • More weakness in USD/CNH is good for risk appetite, regardless of what’s happening in EUR/CNH.
  • Falling US Treasury yields, higher US equity markets, and surging commodity prices suggest that traders are finding the environment not so favorable for the US Dollar.

Chinese Yuan Says ‘Go’

Stable if not softening US Treasury yields have proved to be among the most significant factors driving asset allocation decisions within the EM FX space in recent weeks, and the latest drop in US yields following the April US labor market report has spurred another rally in EM FX. For traders, a weaker US jobs report means the Federal Reserve will keep rates lower for longer without altering its QE program.

In turn, lower US rates are feeding inflationary pressures, manifesting themselves in higher commodity prices; traders are favoring growth-sensitive currencies over low yielding safe havens. Accordingly, the latest rally in the Chinese Yuan following the April US jobs report suggests that markets are taking on a more risk-on tone, one that may accelerate over the coming weeks.

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

Chinese Yuan Technical Analysis: EUR/CNH, USD/CNH Rates Outlook

USD/CNH rates have almost completed the reversal sought to validate the bearish rising wedge pattern in place since late-January. A drop to the yearly low at 6.4008 completes the move lower. However, that’s not to suggest that ‘the bottom’ is close by; instead, price action in USD/CNH rates suggests that deeper losses may be ready to take root. Momentum is firmly bearish, with USD/CNH rates fully below their daily EMA envelope. Daily Slow Stochastics are nestled in bearish territory, while daily MACD’s drop below its signal line has extended. More losses seem likely, particularly when viewed in context of the weekly timeframe.

USD/CNH Rate Technical Analysis: Weekly Chart (November 2016 to May 2021) (Chart 2)

Chinese Yuan Technical Analysis: EUR/CNH, USD/CNH Rates Outlook

A look at the weekly timeframe shows that USD/CNH rates are once again below the 76.4% Fibonacci retracement of the 2018 low/2020 high range at 6.4623, a sign that the recent rebound attempt – which never took back the 61.8% retracement – has failed. The weekly timeframe also suggests that a longer-term bearish rising wedge has formed dating back to early-2017, with the bearish breakout coming in mid-2020. To this end, if the weekly bearish rising wedge interpretation is valid, the USD/CNH rates may be close to resuming their downtrend towards their ultimate target of 6.2356.

EUR/CNH Rate Technical Analysis: Daily Chart (February 2020 to May 2021) (Chart 3)

Chinese Yuan Technical Analysis: EUR/CNH, USD/CNH Rates Outlook

EUR/CNH rates have been playing ping pong between the 61.8% (7.8459) and 76.4% (7.7332) Fibonacci retracements of the 2020 low/high range for the past several weeks. While the pair has broken the downtrend from the August and December 2020 highs, it is currently straddling the rising trendline from the April 2015 and February 2020 lows. Moreover, EUR/CNH rates remain within the descending parallel channel that’s encompassed price action since the start of the year. Until further development on the charts, commentary around EUR/CNH is much ado about nothing.

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

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