USD/CNH technical outlook: is there more upside?

USD/CNH short-term technical forecast – slightly bearish

The Chinese yuan's slide against the US dollar since last week is showing signs of fatigue as it tests a solid cushion.

USD/CNH, up over 2% over the past week, is now running into stiff converged resistance: Thursday’s high of 7.18, the 200-period moving average, and the 89-period moving average on the 240-minute charts (the minor rebound earlier this month ran out of steam at the shorter moving average).

With negative momentum divergence (rising price associated with declining momentum), USD/CNH could find it tough to crack the resistance for now.

This follows a rebound from near support at the October low of 7.01 – a path highlighted in the previous update. Also, USD/CNH met the price objective of a minor topping pattern triggered earlier this month.

USD/CNH 240-minutes chart

The bigger question: does the rebound since last week open the way for USD/CNH to retest the October high of 7.37, or is the pair going to fall further before it retests the record high? Two scenarios could emerge.

The first one is a fallback toward last week’s low of 7.02. A signpost to watch for this scenario to play out would be a drop below immediate support at Friday’s low of 7.11. The support at 7.01-7.02 is crucial – a break below would trigger a head & shoulders pattern -- the left shoulder is at the September high, the head is at the October high, the right shoulder would likely be this week’s high (still unfolding), pointing to a potential fall toward the 200-day moving average (now at about 6.75).

USD/CNH daily chart

The second scenario is where USD/CNH breaks above the immediate converged resistance at 7.17-7.20. Such a break would confirm that the downward pressure had eased, paving the way toward the October high.

USD/CNH monthly chart

Which scenario are the odds leaning to? the negative divergence (rising price associated with stalling or weakening momentum) on the monthly and weekly charts highlighted in October suggests that the downward correction since October may not be over.

That is, the probability of another leg lower – at least toward last week’s low – remains high. Hence, scenario 1 looks like a more probable one. Having said that, a decisive break above 7.20 would negate this scenario.

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