The US Dollar Yuan Rate Has Bounced Off Support - What's Next?
Axi | Feb 21, 2017 13:31
Originally published by AxiTrader h2 Key Takeaway/h2
China again tweaked its calculation method for the daily yuan fix yesterday tightening the window from a 24 hour reference period to just the 15 hours up to 2330 GMT. It's only a very subtle change compared to the expansion of its reference basket earlier this year.
But it's another reminder of the evolution of the Chinese economy, its financial system, and the internationalisation of the renminbi. And a reminder of the iterative changes authorities have been instituting to stem the capital flight from China that threatened to overwhelm the PBOC and SAFE's ability to practically manage the exchange rate mechanism to their satisfaction.
The net result of all of this is that after testing around 7 in late 2016 USD/CNY has had a 38.2% retracement of the April-December rally and is now sitting on important support.
h2 What you Need To Know/h2It's an old axiom of trading that you want to avoid the crowded trades.
So when it seemed everyone was talking USD/CNY to the moon late last year and wringing their hands at the flight of capital from China there was a fair chance that the USD/CNY was getting a little busy and crowded.
That set the preconditions for the recovery in the yuan and a retest of the garden variety 38.2% retracement level of that rally earlier this month. Since then USD/CNY has mapped out a consolidation pattern between 6.8375 and 6.8972 in MT4 1 month rolling NDF terms.
So it's up near the top of the recent range and a move through could signal a bigger US dollar recovery. Equally from a purely technical point of view a break of 6.8298 would suggest a move toward 6.76. But it has to break either side first.
And the reality is that the USD/CNY move is probably more about the US dollar's stalled rally than it is about the yuan side of the cross.
So while the authorities do their best to stem the flood of capital out of the country, and while the recovery in the yuan reflects this. The reality is that like most Asian, indeed global, currencies, this is still very much a US dollar story in a macro sense.
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