USD/CNH closes at 16-month lows, boding well for AUD and NZD bulls

• The offshore-traded Chinese yuan, or CNH, has closed at the lowest level since May 2023
• It is threatening to break below key support
• Unlike other major currencies this week, it has managed to strengthen despite slightly higher US bond yields
• The inverse relationship between USD/CNH and AUD/USD, NZD/USD has been strengthening over the past month.

Overview

Something unusual has happened in FX markets this week that may keep the Australian and New Zealand dollars buoyant against the USD: the offshore-traded Chinese yuan, or CNH, has continued to strengthen against the greenback, bucking the trend seen in other major currencies such as the Japanese yen and euro.

USD/CNH teetering above key support

The USD/CNH daily chart shows the pair closed at the lowest level since May 2023 on Thursday, recording a big bearish engulfing candle that kept building even as the USD strengthened against other currencies. It’s now just a whisker away from taking out the intraday lows set on August 5. Sitting in a descending triangle pattern, and with RSI (14) and MACD showing no meaningful sign of turning higher, the probability of a downside break looks to be growing.

With little visible technical support on offer until 7.01265, if we do break lower, it could be a big move lower.  And that’s potentially important for AUD/USD and NZD/USD, as this next chart shows.

Yuan strength likely to benefit AUD, NZD

The top pane is the USD/CNH daily without annotations, with those below tracking its rolling 20-day correlation with a variety of interest rate and FX markets. While the yuan, like the Japanese yen, has been heavily influenced by US interest rate fluctuations and yield differentials in recent months, it’s notable the relationship has weakened somewhat over the past week, corresponding with the latest leg lower in price.

I’ve searched around to find something to explain it, but as of now nothing is jumping out. But whatever it is or isn’t, the move in the yuan is important for the Aussie and Kiwi dollars.

The pane second from bottom is the correlation with NZD/USD over the past month. The lowest pane is the relationship with the AUD/USD over the same period. Both have seen the inverse relationship with USD/CNH strengthen, indicating the buoyant yuan is helping them to strengthen against the US dollar and other major currencies.

 AUD/USD looking topping after bullish run

The AUD/USD rally has stalled, failing twice to close above former resistance at .6800. Thursday’s long topside wick also warns of growing near-term reversal risk, as does the slight bearish divergence between RSI (14) and price. But if we do see a reversal, I may only be shallow in nature given the prevailing macro environment which is benefiting cyclical plays.

Support is found at .67612 and .67148 with resistance located at .6825, .6871 and .6893.

NZD/USD reversal risk growing

Like the Aussie, NZD/USD may have put in a near-term top on Thursday with a shooting star daily candle. However, with momentum indicators continuing to provide bullish signals, any pullbacks are likely to be limited in scale. Support is found around .6220 and .6150 with resistance at .6300 and .6370.

-- Written by David Scutt

Follow David on Twitter @scutty