Chinese Yuan Technical Analysis: EUR / CNH, USD / CNH Rate Outlook
Outlook for the Chinese Yuan:
- USD / CNH rates fell to their annual lows, and in the grand scheme of things, the rally seen in early 2021 may have been a brief setback before a deeper pullback.
- More USD weakness/ CNH is good for the risk appetite, regardless of what happens in EUR / CNH.
- Falling yields on US Treasuries, rising US stock markets and surging commodity prices suggest that traders are finding the environment less favorable for the US dollar.
Chinese yuan says ‘Go’
Stable otherwise softening U.S. Treasury Yields turned out to be among the most significant factors drive asset allocation decisions within the EM FX space in recent weeks, and the latest drop in US yields after the April US Labor Market Report sparked a further rally in emerging currencies. For traders, a weaker US employment report means the Federal Reserve will keep rates lower for longer without changing its QE schedule.
In turn, the fall in US rates is fueling inflationary pressures, manifested in higher commodity prices; traders prefer growth sensitive currencies to low yielding safe havens. As a result, the latest rally in the Chinese yuan after the April US jobs report suggests markets are taking a riskier tone, which could accelerate in the coming weeks.
Technical analysis of the USD / CNH rate: daily chart (March 2020 to May 2021) (Chart 1)
USD / CNH rates have almost completed the reversal to validate the bearish bullish coin pattern in place since late January. A drop to the annual low at 6.4008 completes the downward movement. However, that does not mean that “the bottom” is near; instead, the price action in USD / CNH rates suggests that larger losses may be poised to take hold. The momentum is firmly bearish, with USD / CNH rates entirely below their daily EMA envelope. Daily Slow Stochastics are nestled in bearish territory as the MACD’s daily drop below its signal line has expanded. More losses seem likely, especially in the context of the weekly period.
Technical analysis of the USD / CNH rate: weekly chart (November 2016 to May 2021) (Chart 2)
A look at the weekly period shows that USD / CNH rates are again below the 76.4% Fibonacci retracement of 2018 low / 2020 high end at 6.4623, a sign that the recent attempt to rebound – which did not never resumed the 61.8% retracement – missed. The weekly calendar also suggests that a long-term bearish bullish wedge has formed since the start of 2017, with a bearish breakout in mid-2020. To that end, if the weekly interpretation of the bearish bullish wedge is valid, USD / CNH rates could be close to resuming their downtrend towards their ultimate target of 6.2356.
Technical analysis of EUR / CNH rates: daily chart (February 2020 to May 2021) (Chart 3)
EUR / CNH rates have been ping-pong between the 61.8% (7.8459) and 76.4% (7.7332) Fibonacci retracements of the 2020 low / high range in recent weeks. Although the pair broke the downtrend from the August and December 2020 highs, it is currently overlapping the uptrend line from the April 2015 and February 2020 lows. In addition, EUR / CNH rates remain in the descending parallel channel that has encompassed the price action since the start of the year. Until the charts develop further, comments on EUR / CNH are silent.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist