USDCNH Consolidates in Symmetrical Triangle

31 May 2022

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).

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)


Trade Forex on Phillip MetaTrader 5 (MT5).

Trade Forex at zero commission on Phillip MetaTrader 5, a dynamic platform that offers low spreads. Integrated with Acuity’s Signal Centre and Trading Central Indicators, and available on mobile and desktop app, you will never miss a trading opportunity with Phillip MT5.

Download Trading Central’s Market Buzz for updates on more topics.

What’s more? Phillip MT5 is now supported on Mac OS! To install, simply download the file below and complete a simple installation process.

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

 

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

More Market Trends

Pre-elections analysis courtesy of Eurex   With Germany heading to the polls on Sunday, 23 February 2025, all eyes are on how the DAX Futures

Read More >

By Eric Lee, Sales Director, Phillip Nova Copper, often referred to as “Dr. Copper,” is renowned for its ability to predict economic trends due to

Read More >