USD/CNH: reversal in sight as US-China trade talks get back on track

USD/CNH a barometer for trade talks

The outlook for US-China relations have been deteriorating over the course of recent months, with the decline in equities at the start of May coinciding with the breakdown in talks between the two sides. The importance of market sentiment over these negotiations should not be understated, for certain markets essentially act as the barometer for those talks.

USD/CNH is one such market, with the pair largely tracking the progress throughout 2018 and 2019. The daily chart below provides us with the journey, with the threats and ultimate implementation of tariffs through quarter two (Q2) and Q3 2018 bringing about a huge rally for the dollar at the expense of the Chinese yuan. With those talks stabilising through the latter part of the year, we saw a clear shift in tone through the end of 2018 and the beginning of 2019. Talk of very productive meetings heralded a new sense of optimism, with the end seemingly in sight for this breakdown in relations. However, with May 2019 bringing a breakdown in talks of further tariffs, it has come as no surprise that we have seen the pair move higher once more.

This week seems to mark a turning point once again, as comments from the US President Donald Trump put trade negotiations back on the table. Next week’s Group of 20 (G20) meeting was always going to be a hugely significant event, with Trump’s promise of further tariffs in the event of a Chinese no-show pointing towards a make or break moment.

However, the President of China Xi Jinping and Trump are now scheduled to embark on an extended meeting in Osaka. With the two sides back in negotiation ahead of that meeting, there is reason to believe we could see talks get back on track from here.

Charts starting to turn lower

A look back at the weekly chart above shows that the pair has been trading at a crucial area of resistance, with the pair remaining below the crucial 2017 high of ¥6.9874. Given the two reversals in 2017 and 2018, this recent rally looks like another potential reversal point if trade talks continue to make headway.

Double top formation signals potential reversal

The daily chart highlights the importance of the 27 May low of ¥6.8977, with USD/CNH turning higher from that area of support today.

The ability to break below that level will be crucial for the bearish story to gain traction, completing a double top formation in the process. As such, watch out for a break below that neckline to spark a wider bearish picture, with a continued progress in US-China trade negotiations providing greater confidence that we are seeing the beginning of another substantial sell-off for the pair.