Talking Points:
- USD/CNH Technical Strategy: Flat
- US Dollar Finds Support, Gains Most in a Week vs. Chinese Yuan in Offshore Trade
- Sudden Change in China FX Policy May Scramble Charts, Warning Against Exposure
The US Dollar is attempting to resume the uptrend against the Chinese Yuan, putting in the largest daily advance in a week in offshore trade. The move foreshadowed a higher setting for the daily USDCNY fix, in line with the policy-setting regime that Chinese authorities outlined in August.
From here, a daily close above the 14.6% Fibonacci expansion at 6.6246 opens the door for a test of the 23.6% level at 6.6646. Alternatively, a reversal below the January 13 low at 6.5599 paves the way for a challenge of resistance-turned-support at 6.5215.
We noted some months ago that Yuan devaluation is designed to undo prior market intervention that kept the currency artificially strong against the US Dollar. Chinese FX reserves have continued to fall since the first big-splash weakening of the official CNY rate in August, suggesting Beijing is fighting to slow the pace of depreciation. This means that if the markets were left to their own devices, the Yuan would plunge more aggressively.
On balance, this makes for a precarious environment in which to rely on technical cues. If China suddenly abandons the effort to slow devaluation or intervenes with greater vigor, chart patterns are likely to unravel as shell-shocked markets scramble to reposition. With that in mind, we will stand aside.
