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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
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Chinese Yuan Outlook:

  • Strength in the Chinese Yuan has recently been harder to come by as the Chinese government cracks down on the domestic tech industry.
  • USD/CNH rates may be losing their summer uptrend by breaking below their May and August swing lows.
  • EUR/CNH rates remain in a multi-month descending channel, suggesting that risk appetite remains strong.
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Chinese Yuan Changing Course?

As the Chinese government took measures to reign in the domestic Chinese tech industry over the last few weeks, the Renminbi hit a slide against its major counterparts. Coupled with news from the end of the second quarter that the People’s Bank of China was pushing financial institutions to increase the ratio of their foreign exchange deposits, the Chinese Yuan embarked on a steady descent; but rather than a concerted devaluation, it appears that recent price action was more of a controlled depreciation producing slight, not acute, weakness.

Sprinkle in delta variant concerns – China has embarked on a ‘zero COVID’ policy – the Yuan had lost some of its flare as a proxy for global growth. But as evidence accumulates that the delta variant is just a brick in the wall of worry for global financial markets, risk appetite has started to firm. As US equity markets stretched to fresh record highs, the Yuan has garnered attraction anew as investors may have started to look past China’s domestic concerns.

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

Looking at the daily timeframe, USD/CNH rates may have just hinted that they’ve turned the corner after rising steadily for the better part of three months. In losing the uptrend from the May and August swing lows, the pair staved off a breakout from the descending channel in place since November 2020.

Now below its daily EMA envelope, USD/CNH may be eyeing a return to a familiar area from June and July: the 76.4% retracement of the 2018 low/2020 high range at 6.4623; and the 61.8% retracement of the 2014 low/2020 high range at 6.4656. A drop through this area (and ultimately below its July low at 6.4562) could make for a quick return to the ascending trendline from the January 2014 and March 2018 lows near 6.4200 over the coming weeks.

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

Back in June, when last discussed, it was noted that “conditions in EUR/CNH suggest that more downside is possible long-term, even as the pair continues to range between the 61.8% (7.8459) and 76.4% (7.7332) Fibonacci retracements of the 2020 low/high range. The fact remains that the pair has broken the ascending trendline from the April 2015 and February 2020 lows.”

The multi-month descending channel in place since the end of December 2020 has remained the dominant guide to price action, and after setting fresh yearly lows just last week, rallies in EUR/CNH may look to be sold before the pair makes an attempt at its 2020 low at 7.5510.

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

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

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