CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open an account
☰
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open an account
✖

USD/CNH looks eerily similar to USD/JPY right now. Multi-year highs incoming?

Article By: ,  Market Analyst
March 27, 2024 6:44 AM
  • USD/CNH comes across as a lagged version of USD/JPY, sitting in a broad ascending triangle pattern
  • Policymakers from both Japan and China are either intervening or threatening to intervene to support their respective currencies against the US dollar
  • Buying USD/CNH dips remains the preferred play until we see a clean and sustained break of uptrend support

The overview

There’s not much difference between the USD/CNH and USD/JPY on the weekly charts, other than the former appears to be lagging the latter. With the yen falling to fresh multi-year lows even with the threat of BOJ intervention, will the yuan be next?

Buying USD/CNH dips remains the preferred strategy until the uptrend breaks.

The background

Whether it’s fundamentals or technicals, the Chinese yuan looks eerily similar to the Japanese yen right now. Both are under pressure, especially against the US dollar, forcing policymakers from China and Japan to either directly or threaten to intervene to prop up their value. Other than the BOJ starting to tighten monetary policy while the PBOC continues to ease, the only other obvious difference between USD/CNH and USD/JPY is the former is lagging the latter with the yen briefly hitting fresh lows on Wednesday.

The bullish trend for USD/CNH looked like it was coming to an end earlier this month. Chinese stocks were rebounding, encouraging capital inflows for foreign investors. Economic data was also showing signs of turning around, helping to stabilise what was arguably extreme bearish sentiment. USD/CNH broke its uptrend dating back to early 2022, suggesting the bear trend for the yuan was in it’s final act. But it wasn’t.

You can see on the chart below that it was a false break, with the bullish hammer candle on the weekly providing a sign of things to come. Followed by a surprisingly weak USD/CNY fix last Friday, not only did the price surge back into the uptrend but also took out horizontal resistance at 7.2400.

Even with renewed support from the PBOC this week, the price action looks unconvincing for USD/CNY shorts, bouncing off the former resistance, bolstering the case for the path of least resistance being higher.

Just like USD/JPY, USD/CNH sits in an ascending triangle pattern, sandwiched between uptrend support and resistance at 7.3750. While it’s some distance from a potential upside break, convention suggests it may trade above 8.0000 should the full extension play out.

Wouldn’t that make for some spicy foreign policy debates at upcoming US Presidential debates!

The trade setup

While a break of the ascending triangle is a trade to put on the radar, nearer-term, the easiest option is to respect the trend until the price doesn’t. Just look how many times USD/CNH has bounced from it, with the 50-week moving average mopping up the remaining threats whenever the latter has faltered.

Buying dips remains the preferred play until we see a clean and decisive break of both.

Those contemplating the strategy could buy on moves towards the uptrend, allowing for stop losses to be placed either below the support or 50wma. Minor resistance is located around 7.28, the high hit on Friday on Monday. Beyond, sellers may be lurking above 7.33 but there’s not a lot of resistance evident until around 7.3650. If we get to those levels, traders will be on alert for a topside break of the ascending triangle.

The wildcards

China has around $3.3 trillion in FX reserves, so it can fight market forces for a considerable period via multiple mechanisms. Amplifying the risk of capital flight could see the PBOC’s recent attempts to slow the yuan’s depreciation continue. Unless we see a sustained improvement in sentiment towards China’s economic outlook, it’s hard to see yuan appreciating by any meaningful degree unless it stems from the US side of the equation.

On the latter, any further scaling back of Fed interest rate cut expectations may lead to an accelerated rally in USD/CNH. Conversely, any significant increase in easing expectations could threaten the sustainability of the uptrend. The former comes across as the more likely scenario right now.

-- Written by David Scutt

Follow David on Twitter @scutty

 

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation.

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

© FOREX.COM 2024