Chinese Yuan Outlook:
- USD/CNH rates have experienced a more significant technical breakdown than their EUR/CNH counterpart.
- In general, more weakness in USD/CNH is good for risk appetite, regardless of EUR/CNH price action.
- Falling US Treasury yields and elevated US equity markets reinforce a market narrative hasn’t been favorable for the US Dollar.
PBOC Flexes on Chinese Yuan
The Chinese Yuan is experiencing some weakness as the first week of June matures into its second half, thanks in part to the news earlier in the week that the People’s Bank of China would be mandating that financial institutions increase the ratio of their foreign exchange deposits to 7% from 5%. In other words, the PBOC mandated that financial institutions hold more foreign currency, thereby forcing Chinese domestic market players to rebalance away from the Yuan.
This near-term setback may be just that – a near-term setback. The Chinese Yuan has already made a significant technical breakout versus the US Dollar (via USD/CNH), and while the Yuan-Euro cross has not been as volatile, it remains the case that consolidating markets are reminiscent of a coiling spring: as potential energy is stored, we as traders await the kinetic energy release – the breakout.
USD/CNH Rate Technical Analysis: Weekly Chart (November 2013 to June 2021) (Chart 1)
Looking at the weekly timeframe, USD/CNH rates have made a decisive break below two important Fibonacci levels: the 76.4% retracement of the 2018 low/2020 high range at 6.4623; and the 61.8% retracement of the 2014 low/2020 high range at 6.4656. Concurrently, fresh yearly lows were reached last week prior to rebound at the start of June.
Consistent with the breakdown through the uptrend from the 2014 and 2018 lows, as well as the perspective that the weekly timeframe also suggests that a longer-term bearish rising wedge has formed dating back to early-2017 (with the bearish breakout coming in mid-2020), USD/CNH rates are still on track towards their ultimate target of 6.2356.
EUR/CNH Rate Technical Analysis: Weekly Chart (June 2012 to June 2021) (Chart 2)
Conditions in EUR/CNH suggest that more downside is possible long-term, even as the pair continues to range between the 61.8% (7.8459) and 76.4% (7.7332) Fibonacci retracements of the 2020 low/high range. The fact remains that the pair has broken the ascending trendline from the April 2015 and February 2020 lows.
But seeing as how EUR/CNH rates remain within a descending parallel channel that’s encompassed price action since the start of the year, it remains the case as it was last month that “until further development on the charts, commentary around EUR/CNH is much ado about nothing.”
— Written by Christopher Vecchio, CFA, Senior Currency Strategist