Chinese yuan technical analysis: outlook for EUR / CNH, USD / CNH rates

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Outlook for the Chinese Yuan:

  • USD / CNH rates experienced a larger technical failure than their EUR / CNH counterpart.
  • In general, more weakness in USD/ CNH is good for the risk appetite regardless of EUR / CNH Price action.
  • Falling US Treasury yields and rising US stock markets reinforce a market rhetoric that has not been favorable to the US dollar.

PBOC weakens on Chinese yuan

The Chinese yuan is experiencing some weakness as the first week of June matures in its second half, in part thanks to the announcement earlier in the week that the People’s Bank of China would require financial institutions to increase their ratio. foreign currency deposits compared to 7% to 5%. In other words, the PBOC demanded that financial institutions hold more foreign currency, forcing Chinese domestic market players to move away from the yuan.

Perhaps this short-term setback is just that – a short-term setback. The Chinese Yuan has already achieved a significant technical breakthrough against the US Dollar (via USD / CNH), and while the Yuan-Euro cross has not been as volatile, the fact remains that consolidating markets are reminiscent of a coil spring: as potential energy is stored, we traders wait for the release of kinetic energy – the breakout.

Technical analysis of the USD / CNH rate: weekly chart (November 2013 to June 2021) (Chart 1)

As for the weekly calendar, USD / CNH rates made a decisive break below two important Fibonacci levels: the 76.4% retracement of the 2018/2020 high range at 6.4623; and the 61.8% retracement of the 2014 high range to 6.4656. At the same time, new annual lows were hit last week before a rebound in early June.

In line with the uptrend decomposition from 2014 and 2018 lows, as well as the prospect that the weekly calendar also suggests that a longer-term bearish wedge has formed since the start of 2017 ( with the breakout coming down in mid-2020), USD / CNH rates are still on track to reach their ultimate target of 6.2356.

Technical analysis of the EUR / CNH rate: weekly chart (June 2012 to June 2021) (Chart 2)

Chinese yuan technical analysis: outlook for EUR / CNH, USD / CNH rates

EUR / CNH conditions suggest that further decline is possible in the long term, although the pair continues to sit between the 61.8% (7.8459) and 76.4% (7.8459) Fibonacci retracements. 7332) of the 2020 low / high range. The fact remains that the pair broke the uptrend line of the April 2015 and February 2020 lows.

But given that EUR / CNH rates remain in a descending parallel channel that encompasses price action since the start of the year, it remains the case as was the case last month that “until the Charts are developing, comments around EUR / CNH are much more ado about nothing.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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