EUR/CNY dives out five year bullish channel, PBOC to intervene?

The EUR/CNY has dived out of the five-year-long bullish channel and the resulting CNY appreciation, if any, could force the People’s Bank of China into action.

Monthly chart

As seen above, USD/CNY closed last month at 7.5273, confirming a downside break of the rising channel connecting the lows seen in March 2015 and May 2018.

The breakdown represents a bullish-to-bearish trend change and is supported by the below-50 print on the relative strength index (RSI) and the descending 5 and 10-month moving averages.

The path of least resistance is therefore to the downside. As a result, the immediate support at 7.3955 (May 2018) stands exposed. Acceptance below that level would only bolster the bearish setup, as discussed above and open the doors for a deeper slide towards 6.5.

It is worth noting that the pair faced repeated rejection at the 100-month moving average in seven months to January 2019 before violating the rising channel. Hence, the longer-term bullish view would be revived only above that average, currently at 7.8890.

The bearish chart structure goes well with the fact that the probability of the ECB rate hike has more or less evaporated. The markets believe the Fed is also done with rate hikes and could actually cut rates next year.

CNY strength could force the PBOC to take action

The European Union and China are two of the biggest trading partners in the world. The EU is China’s largest trading partner, according to the FAS project (Federation of American Scientists).

As a result, a sustained rise in CNY against the shared currency, as signaled by the USD/CNY’s monthly chart, could add to the downside pressure on China’s economy.

Hence, China’s central bank will likely cut the reserve requirement ratio to keep CNY from rising rapidly against the EUR.