After a persistent downtrend since May 2020 that saw the USDCNH decline 12.3% from the height of 7.19 to a low of 6.30, the pair rebounded strongly in April 2022 and is currently hovering around 6.80. The US Dollar Index (DXY) that gauges the strength of the greenback against a basket of rival currencies has also been on an uptrend since May 2022. The latest price actions show that the pair broke out from a symmetrical triangle, signalling a strong bullish momentum with further upside potential.
PBOC cuts interest rates in a surprise move
One of the factors that drove the Chinese yuan weaker against the greenback this week is an unexpected interest rate cut by the People’s Bank of China (PBOC) on Monday. Amid the sluggish economic growth, the PBOC reduced the main rate at which it provides short-term liquidity to banks, from 2.1% to 2%. To “maintain reasonable and sufficient liquidity in the banking system”, the rate of its one-year lending facility was also cut from 2.85% to 2.75%.
China’s unwavering pursuit of its zero-Covid policy and a deepening property downturn had prompted the Chinese central bank to further ease its monetary policy despite the risk of escalating inflationary pressures. Interest rate cuts, especially an unanticipated one, is normally bearish for a currency. Moreover, the dovish policy would also be a disadvantage to the currency in this global rising interest rates environment.
Downbeat Chinese economic data
Other than the interest rate cut, a series of economic data announced on Monday also weighed on the Chinese yuan. The Industrial Production released by the National Bureau of Statistics in China revealed that industrial output increased only 3.8% year-over-year in July, lower than the market consensus of 4.6% and the previous month’s data of 3.9%.
On the other hand, China’s Retail Sales in July also disappointed markets for the second consecutive month, with a 2.7% growth that is under the 5% market expectation. Retail Sales is a vital indicator to study the changes in the Chinese retail market and it reflects the degree of economic prosperity. A low reading is generally bearish for the nation’s currency and vice versa.
Technical Analysis
After consolidating in a symmetrical triangle since May, USDCNH broke out of the bullish continuation pattern. The RSI is in bullish territory above 60 but a bearish divergence calls for caution. Looking ahead, the immediate resistance for the pair is 6.8388 (R1). If price manages to rise beyond this level, the next target lies at 7.03 (R2). In the meantime, 6.7707 (S1) should provide support and as long as this level is held, the trend remains bullish.
Key events to watch this week:
Tuesday, August 16
USD – Building Permits (MoM)(Jul), Housing Starts (MoM)(Jul)
Wednesday, August 17
USD – Retail Sales (MoM)(Jul), Retail Sales Control Group(Jul), Retail Sales ex Autos (MoM)(Jul), Fed’s Bowman speech
Thursday, August 18
USD – FOMC Minutes, Fed’s Bowman speech, Initial Jobless Claims(Aug 12), Initial Jobless Claims 4-week average(Aug 12), Philadelphia Fed Manufacturing Survey(Aug)
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