USD/CNH has retraced 23.6% of trade war rally

USD/CNH is currently trading just below 6.9690 – the 23.6% Fibonacci retracement of the rally from the March 2018 low to August 2019 high. 

During that period, the pair had rallied from 6.2353 to 7.1956, as the markets offered Yuan on the escalating US-China trade tensions. 

The rally ran out of steam in the final quarter of 2019 with the easing of trade tensions.  The pair fell from 7.1675 to sub-7.00 levels in the three months to December. 

Ascending trendline breached

USD/CNH closed last week at 6.9650, violating the trendline rising from March 2018 and April 2019 lows. 

The 14-week relative strength index has also dropped into the bearish territory below 50.

Therefore, the path of least resistance appears to be on the downside – more so, due to continued de-escalation of trade tensions. South China Morning Post reported on Monday that China’s trade delegation may travel to Washington for four days from Jan. 13 for the signing of the phase one deal that would signal a truce in the costly trade war between the world’s two largest economies.

Also, the market focus has recently shifted from trade tensions to geopolitics. The US killed the commander of the Iranian Revolutionary Guard's Quds Force, General Qassem Soleimani. Tehran criticized the move and warned of retaliation, sending riskier assets lower across the board. 

The offshore Yuan, however, managed to remain bid and made sure the USD/CNH pair breached the ascending trendline, as noted earlier. 

Yuan's resilience looks more impressive if we take into account the recent decision by the People's Bank of China to cut banks’ reserve requirement ratio (RRR) by 50 basis points, effective Jan. 6. The PBOC has cut RRR eight times since early 2018.

Technical levels