USD/CNH reversing amid US-China optimism

This month’s US-China trade talks may have passed without any particular breakthrough, yet from a market perspective, the rush to catch the beginning of the huge eventual market move has started. This is according to the best barometer for US-China trade talks: USD/CNH. The Chinese yuan has been a huge mover throughout this trade war, with the 10% tariffs from the US being largely counteracted by a 12% devaluation for the yuan from the March high to the October low. With Chinese trade being targeted by the trade war, it comes as no surprise to see that the yuan has been the main target of selling as the trade war intensifies. However, today’s trade data from China goes some way to debunking that notion, with the China-US trade surplus reaching record highs. Perhaps there is reason to believe that part of the reasoning behind why markets have been buying or selling the yuan could be flawed.

Nevertheless, last week saw USD/CNH post the largest weekly decline since January 2017. Interestingly, that week marked the beginning of a 14-month decline for the pair. This begs the question of whether we have also seen a market top this time around.

Ultimately, the answer will come down to whether or not both sides can continue to make headway towards a deal. Markets do not need an immediate deal, as we have seen over the past month. Instead, some sense of progress should ensure that traders continue to trade in anticipation of an eventual deal.

USD/CNH weekly chart

Looking at the USD/CNH chart below, the rally back into that January 2017 peak provided us with the perfect reversal point for the pair, with a break below 6.8525 providing the first tangible signal that a reversal could be in the offing. We have since seen the price break below the 6.7816 mark to confirm a bearish turnaround is in play.

USD/CNH daily chart

Taking it down to the daily chart, we have seen a clear topping off in this pair, bringing about a five-month low. However, with Friday and today looking likely to post a tweezer reversal pattern, there is a chance that we could see some form of rebound in the coming days. The bullish shift in momentum on the stochastic oscillator highlights this same potential upside for the short term.

However, irrespective of whether we see such a rebound or not, this market looks likely to decline further throughout the coming weeks and months, with a break through the last swing high of 6.9248 required to negate this bearish view.