USDCNH at 6-Month Lows Ahead of Key Chinese Data

Unless you’ve been living (and trading) under a rock over the last month, you know that the US dollar has been surging against all of its major rivals since mid-August. Since August 11, the dollar index has risen by over 3%, with the greenback rising by even more against its biggest rivals, the euro and the yen. However, there is one currency that has been able to buck the broad-based strength in the buck: China’s yuan.

Based on the recent mixed economic data out of the world’s second-largest economy, the strength in China’s currency has been a bit of a surprise. Over the weekend, China’s trade balance hit a record surplus on strong exports, though the outright contraction in imports has some analysts worried about the performance of China’s domestic economy. Meanwhile, in today’s Asian session, inflation data came out lower than expected, with consumer prices rising only 2.0% vs. 2.2% expected and producer prices fell by -1.2% vs. -1.1% eyed. Over the next couple of days, traders will get their first glance at a series of higher-impact reports including New Loans, Fixed Asset Investment, and Industrial Production data from August. If these reports fail to live up to expectations, the PBOC may be forced to push the USDCNH exchange rate back higher.

Technical View: USDCNH

As we alluded to above, the Chinese yuan is not a completely free-floating currency. Instead, the People’s Bank of China (PBOC) sets a “central parity rate” against a basket of world currencies (primarily the U.S. Dollar), and the currency is allowed to oscillate within a 2% band around that level. For reference, the PBOC set today’s central parity rate at 6.1453, meaning that it will allow the currency to fluctuate between 6.0224 and 6.2682. Because of this so-called “managed float” regime, the efficacy of traditional technical analysis is limited, though it can still help traders identify relevant trends and key levels within the trading band.

That said, the USDCNH (US dollar against the “off-shore” Chinese yuan) has formed a clear bearish channel over the last few months. Just yesterday, the pair dipped to a new 6-month low near 6.1300, and from a purely technical basis, there are no signs of an imminent bottom. If anything, a likely “death cross” of the 50- and 200-day MA in the coming week or two would confirm that the longer-term trend has shifted in favor of the bears. Meanwhile, the RSI indicator remains out of oversold territory, suggesting that rates could still fall further before reaching an extreme level.

To the downside, the next major levels of support to watch is the 61.8% Fibonacci retracement at 6.1127, followed by the 78.6% Fibo near 6.0700. Bulls, on the other hand, will exercise caution as long as the pair remains below the confluence of resistance levels from the 50-day MA, 200-day MA, and top of the bearish channel near 6.16.

Source: FOREX.com