Daily brief: Chinese yuan eyes economic data as USD/CNH rises above key level

Friday’s Asia-Pacific outlooks

A risk-off open for Asia-Pacific trading looks likely after market sentiment soured overnight during New York trading. US stock indexes fell after mixed economic data had little impact on Federal Reserve rate hike bets. Fed funds futures show a 22.1% chance for a 100-basis point rate hike at next week’s FOMC policy announcement. The benchmark S&P 500 closed at its lowest level since mid-July, dropping 1.13%. A little over $3 trillion of options is set to expire Friday in US equity markets.

Gold fell to its lowest mark since April 2020. US retail sales for August beat estimates, rising 0.3% in August from the month prior. Initial jobless claims data showed that the labor market is weathering higher rates. Treasuries came under selling pressure throughout the day. Gold-sensitive real yield rose, with the 10-year rate moving above 1%. That weighed on bullion, dragging it below a critical level of support. The yellow was already in a risky spot ahead of the data. More downside is likely on the cards for gold and silver if FOMC bets harden further.

The US dollar DXY index was little changed overnight. A potential rail strike in the US was averted, pressuring the broader commodity space, including WTI crude and Brent crude oil prices. Lumber prices fell nearly 7% in Chicago, and wheat shed over 3%. USD/CAD rose to its highest level since November 2020, weighed down by falling lumber and oil prices, both of which are key Canadian exports.

AUD/USD and NZD/USD were down over 0.5%. The BusinessNZ’s Performance of Manufacturing Index (PMI) rose to 54.9 for August, up from 52.7, a positive sign for New Zealand’s economy. Chinese economic data is in focus today. The August data includes fixed asset investment, industrial production and retail sales. Industrial production is expected to remain unchanged at 3.8% y/y, while retail sales are seen rising to 3.5% from 2.7% y/y. A weak showing from today’s data may induce more yuan weakness.

The Chinese yuan broke above the closely-watched 7 level against the US dollar. The People’s Bank of China (PBOC) has delivered several weeks of daily fixings below analysts’ estimates. The central bank may get more aggressive with prices above 7, but with most of the yuan’s weakness coming from USD strength, it may take a wait-and-see approach for now.

USD/CNH technical outlook

USD/CNH pierced above the psychologically imposing 7 level, marking a significant technical development for the currency pair. The yuan is on track to fall over 1.5% against the dollar in September, which would be its seventh straight monthly loss. A move higher sees the 261.8% Fibonacci extension as a potential obstacle, although it is around 2.5% above current prices.
That Fib extension sits close by the 2019 and 2020 highs at 7.1964, layering the level with confluent resistance. The Relative Strength Index (RSI) broke above 70 into overbought territory and is on track to invalidate a bearish divergence. A pullback below the 7 level would threaten the 161.8% Fib extension, with a break lower exposing the 26-day Exponential Moving Average.

USD/CNH daily chart

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