Chinese Yuan (CNH) News and Analysis
- US-China relations take a step backwards and markets rue lack of stimulus
- USD/CNH rises back to near overbought territory despite near-term USD consolidation
- GBP/CNH soars well into overbought territory but interest rate differentials support bullish continuation nonetheless
- The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library
US-China Relations Take a Step Backwards and Markets Rue Lack of Stimulus
Already fragile US-China relations took a step backwards yesterday after U.S. President, Joe Biden’s insensitive comments about the Chinese leader. The backlash comes one day after U.S Secretary of State Antony Blinken appeared to set the foundation for a return to warmer relations when he made the trip to China – the first visit by a secretary of state for five years.
Yesterday, the People’s Bank of China moved to ease benchmark borrowing rates in an attempt to stimulate lending to support the economic recovery. One 10 basis point cut is unlikely to get the economy firing on all cylinders but appears to be a sign of more to come. The Bank could also lower the current reserve ratio requirement, freeing up more capital within the system. The reserve ratio sets the minimum amount of commercial bank deposits that are required to be kept with the central bank as a buffer to meet increased withdrawals or external shock.
USD/CNH Technical Analysis
USD/CNH has been a one-way market since early February despite mixed US dollar performance – which has rallied and sold off on the back of inflation sensitive news/data. With markets struggling to price in one, never mind two more hikes from the Fed, after officials foresee the Fed funds rate settling between 5.5% - 5.75%. Despite the slowdown in US rate expectations, actual rates in China have dropped, improving US-China interest rate differentials which supports the bullish trend.
After breaching the psychologically important 7.0000 mark, the pair tests 7.1965 with 7.2570 providing the next level of resistance.
USD/CNH Weekly Chart
Source: TradingView, prepared by Richard Snow
Identifying levels of support is a much trickier task given the steep rise. The 20-day simple moving average has provided a dynamic level of support before the 7.000 level comes back into consideration. The pair threatens to re-enter overbought territory once again but the bullish momentum remains in place.
USD/CNH Daily Chart
Source: TradingView, prepared by Richard Snow
GBP/CNH Technical Analysis
Looking at the Chinese yuan alongside a currency that is very much in the ascendency, is the pound sterling. While the USD/CNH rise is impressive, GBP/CNH has exhibited an even greater exponential rise, testing a major level of resistance at 9.1930. Given the market is so heavily within overbought territory, even a shallow pullback from here would be welcomed by those looking at bullish continuation setups. Given the weakening fundamental backdrop in China against the ‘higher for longer’ narrative in the UK after core inflation rose again in May; the longer-term bullish trend appears likely to remain in place.
GBP/CNH Weekly Chart
Source: TradingView, prepared by Richard Snow
Major Risk Events Ahead
High impact US-China economic data appears rather light however, on the political front there is a lot that is unfolding, with the ability to influence financial markets. Powell gets his two-day testimony underway today as he answers questions posed to him by the U.S. House Financial Affairs Committee. Tomorrow he will testify in front of the US Senate Banking Committee. Durable goods, consumer confidence and Powell’s speech at an ECB hosted panel discussion make up the major risk events in the next few days.
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--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
