USD/CNY is flashing red as the PBOC introduces reserve requirement ratio

USD/CNY is reporting losses in early trade as the PBOC's reserve requirement ratio takes effect today.
The PBOC announced the weakest daily CNY fix since May 2017 but is being ignored by the markets.

Omkar Godbole FXStreet Contributor

The People's Bank of China's (PBOC) decision to reintroduce a strategy to halt CNY decline is boding well for the battered Chinese currency for the second day.

At press time, the USD/CNY pair is trading at 6.8098, having hit a low of 6.7979 a few minutes ago.

The currency pair created an inverted bearish hammer on Friday as it fell from 6.8935 to 6.8288 after the PBOC said it will set a reserve requirement ratio of 20 percent from Monday for the financial institutions settling foreign exchange forward yuan positions.

The move is aimed at discouraging dollar purchases and stall the downtrend in CNY. However, past experience suggests the relief will likely be short-lived. For instance, a similar move initiated in 2015 helped the CNY for a week or two and was followed by relentless selling in the subsequent weeks.

Accordingly, the CNY may remain solid bid for a couple of weeks, a sentiment also echoed by the technical charts. A close today below 6.8288 (Friday's low) would validate Friday's bearish inverted hammer and the bearish divergence of the 14-day relative strength index (RSI).

USD/CNY Technical Levels

Support: 6.7889 (Aug1 low), 6.7364 (July 26 low), 6.7179 (July 3 high)

Resistance: 6.8332 (session high), 6.8935 (Friday's high), 7.00 (psychological level)

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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