The USDCNH currency pair has had a strong bullish reversal since hitting a bottom at around 6.3058 in the latter half of February 2022. The strength of the US Dollar against the Chinese Yuan can be attributed to several factors which include sour risk sentiments amid the war in Europe, COVID-19 lockdowns in China, global supply chain disruptions and diverging monetary policies between People’s Bank of China (PBOC) and the US Federal Reserve (Fed). This article will highlight some recent fundamental and technical developments that may shape the USDCNH price movement going forward.
Hawkish US Federal Reserve
One of the main drivers for the US Dollar’s strength remains the hawkish Federal Reserve. After two years of ultra-loose monetary policy to support the pandemic hit US economy, the labour market and the economy has recovered well, resulting in the highest inflation rates in 40 years. In response to the soaring cost of living, the Fed had begun raising interest rates in March and May, with consistent hikes expected throughout the year.
Markets are currently are expecting the Fed to raise benchmark borrowing rates to a range between 2.5%-2.75%, to be in line with a neutral rate. However, if inflation continues to rise, the Fed is likely to go even further. The fed funds rate currently is set between 0.75% and 1%. Federal Reserve Governor Christopher Waller said on Monday that he is “not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target”.
Economic recovery in China expected to be slow
On 31st May, the China Federation of Logistics and Purchasing (CFLP) released data on the Manufacturing Purchasing Managers Index (PMI) which studies business conditions in the Chinese manufacturing sector. The manufacturing PMI rose to 49.6 in May, as compared to 41.9 in the previous month. Although there is an improvement from April, the data falls below the consensus of 50.7. Any reading above 50 signals expansion, while a reading under 50 shows contraction. The recovery in the Chinese economy is expected to be slow, as the labour market remains weak, with small private firms reporting much weaker conditions and construction activity had slowed. As the Chinese economy has influence on the global economy, this economic indicator would have an impact on the Forex market.
Despite the loosening Covid-19 curbs amid the plummeting cases in China, the COVID-Zero policy remains a real risk for the economy.
Technical Analysis
The USDCNH pair is consolidating within a symmetrical triangle formation. While prices could either break out or break down from this pattern, its occurrence after an uptrend induces bias for bullish continuation. At the time of analysis on 31 May, the Relative Strength Index (RSI) tested and rebounded from the neutral line of 50, which signals that the bullish momentum still holds amid the price correction.
Looking ahead, it is highly probable that prices continue to consolidate in a narrower range into the apex of the triangle. If price breaks out from the upper resistance line, potential resistance levels lies at R1 (6.7854) and R2 (6.8388). Prices moving above the 20 exponential moving average (20 EMA) would validate the move up. In the event of a breakdown, traders could set their downside target at S1 (6.6477) and S2 (6.6097).
Key events to watch this week:
Tuesday, May 31
USD – Housing Price Index (MoM)(Mar), S&P/Case-Shiller Home Price Indices (YoY)(Mar), Chicago Purchasing Managers’ Index(May), Consumer Confidence(May)
Wednesday, June 1
CNH – Caixin Manufacturing PMI(May)
USD – S&P Global Manufacturing PMI(May), ISM Manufacturing Employment Index(May), ISM Manufacturing New Orders Index(May), ISM Manufacturing PMI(May), ISM Manufacturing Prices Paid(May), Fed’s Williams speech
Thursday, June 2
USD – Fed’s Bullard speech, Fed’s Beige Book, ADP Employment Change(May), Initial Jobless Claims(May 27), Nonfarm Productivity(Q1), Unit Labor Costs(Q1), Factory Orders (MoM)(Apr)
Friday, June 3
USD – Average Hourly Earnings (MoM)(YoY)(May), Labor Force Participation Rate(May), Nonfarm Payrolls(May), U6 Underemployment Rate(May), Unemployment Rate(May), S&P Global Composite PMI(May), S&P Global Services PMI(May), ISM Services PMI(May)
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