USD/CNH, Iron Ore, Copper: China stimulus pivotal to counteract domestic weakness, Trump tariff threat

• Traders are positioning for further China stimulus with buying in stocks, commodities, and yuan
• Stimulus announcement expected Friday, with estimates ranging from 2 to 10 trillion yuan
• Key levels to watch in USD/CNH, iron ore, and copper as markets eye technical setups
• Size of stimulus crucial to counter both weak domestic growth and looming Trump tariffs

Overview

Traders are following the playbook used before prior stimulus announcements from China, buying up Chinese stock indices, industrial commodities and cyclical currencies, including the yuan.

But will this be any different to those of the recent past, delivering disappointment at the amount of fiscal thrust? With Donald Trump’s re-election as US President, carrying the threat of 60% tariffs on every Chinese-made good entering the United States within three years, expectations are elevated as to what may be unveiled on Friday following the conclusion of the National People’s Congress Standing Committee (NPCSC) meeting.

It's expected to unveil a significant fiscal stimulus package, with estimates ranging from 2 to 10 trillion yuan ($280 billion to $1.4 trillion). Media reports beforehand suggest it may provide local government debt relief, further stabilisation measures for the property sector, along with programs to boost industrial growth and consumer spending.

The size and composition will be key to determining the reaction in markets, with traders looking for a strong response to counter not only sluggish domestic economic growth but Trump’s proposed tariffs. 

Whatever is announced, China-linked markets remain respectful of known technical levels despite recent volatility, offering something of a blueprint for traders to work with when assessing potential setups.

We look at USD/CNH, SGX iron ore and COMEX copper.

USD/CNH bouncing between moving averages

Source: TradingView

The scale of Wednesday’s daily candle provided a clear signals, delivering a huge key reversal, seeing the price surge to the highest level since August. It could have been even more if not for reports of intervention from state-backed Chinese banks to counter dollar strength. The rally stalled above the 200DMA and horizontal resistance at 7.20400, the latter acting as support on several occasions earlier this year. It has since retraced marginally ahead of the stimulus announcement.

Even with the near-term threat of state intervention, as a pair often influenced by interest rate differentials between the US and China, the bias is to buy dips and breaks in the near-term, especially with momentum indicators generating bullish signals on Wednesday.

7.16400 is the initial downside level of note, the high established on October 29. If the price were to move back towards that level, or break and close above 7.20400, you could buy the dip or break with a stop below for protection. Above the 200DMA and 7.20400, topside targets include 7.2580, 7.2973 and 7.31140. While unlikely in the near-term without a large reversal in US bond yields, the 50DMA is a downside level traders should keep on the radar.

Iron ore grinding higher, but beware downside risks

Source: TradingView

SGX iron ore is another favoured proxy to play the China stimulus trade, grinding higher into the announcement within a rising wedge.

Convention suggests a downside break is more likely than topside, and that looks a reasonable assumption unless China delivers something even larger than the upper end of estimates. The proximity of the 200DMA should also worry bulls considering time spent above it recently has been fleeting at best. That may explain why the price struggled above $105.50 earlier this week.

If we were to see a downside break of the wedge, levels to watch include $101.30, the 50DMA at $99.95 and October low of $98.10. There is no obvious signal from momentum indicators, although RSI (14) continues to grind higher in a modest uptrend.

Copper crunched through key levels

Source: TradingView

COMEX copper was among the hardest hit contracts on Wednesday, slumping over 5%, taking out uptrend support along with the 50 and 200DMAs along the way. The sheer size of the candle, and evening star pattern it completed, suggest risks remain slanted to the downside despite the modest bounce today.

With the price unwind stalling at $4.25, a minor support level established in September, it provides a potential level to build trade setups around.

A break below could allow for shorts to be set with a stop above for protection. $4.025 is one potential downside target, $3.921 another. Alternatively, should the price manage to hold above it, you could buy with a stop beneath targeting $4.50 or even $4.79. To make either of those trades stick, they would need to clear the former uptrend and 50DMA found around $4.35. Without a blowout stimulus package, that may prove difficult near-term.

-- Written by David Scutt

Follow David on Twitter @scutty