Chinese Yuan Outlook:The Chinese Yuan gained sharply versus the major developed currencies over the past nine months, but Chinese New Year appears to have put the kibosh on the rally for now.Both EUR/CNH and USD/CNH rates have risen in recent weeks, perhaps foreshadowing a more difficult period for risky assets.It’s important to consider that Chinese statisticians typically combine data for January and February to smooth out volatile figures around the Chinese New Year, so it may be short-sighted to take recent price action as indicative of ‘true’ conditions.Chinese Yuan Not Acting Like a Metal OxThe Chinese Yuan gained sharply versus the major developed currencies over the past nine months, but the arrival of Chinese New Year appears to have put the kibosh on the rally for now.It’s important to consider that Chinese statisticians typically combine data for January and February to smooth out volatile figures around the Chinese New Year, so it may be short-sighted to take recent price action as indicative of ‘true’ conditions.Nevertheless, both EUR/CNH and USD/CNH rates have risen in recent weeks, perhaps foreshadowing a more difficult period for risky assets. In recent years, rises in US Treasury yields have hit EM FX particularly hard, and it would stand to reason that the recent rise in the US Treasury 10-year yield above 1.300% is spilling into the EM FX world again. Seasonally, February typically produces losses in the Chinese Yuan around the holiday. It may not be the case that the Chinese Yuan comes back into vogue until normalized liquidity conditions in Chinese markets in March. (To underscore this point: there is but one Chinese data release over the coming week.) Now, EUR/CNH and USD/CNH rates are rising towards their pandemic downtrend, suggesting a critical test may be on the horizon.
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USD/CNH Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 1)USD/CNH rates quickly broke their 2020 lows at the start of 2021, and a fresh yearly low was just established earlier this month. However, little progress has been made over the past week, with USD/CNH rates turning higher for four of the past five sessions. A run higher to the 6.4970/6.5155 zone (support in December 2020, resistance in January 2021) can’t be ruled out, which necessarily means that the descending trendline from the May and November 2020 highs may soon be tested.Momentum is has neutralized after the recent reversal higher. USD/CNH rates are now above their daily 5-, 8-, 13-, and 21-EMA, which is not yet in bullish sequential order. Daily MACD is trending higher but remains below its signal line, while daily Slow Stochastics have risen through their median line.
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EUR/CNH Rate Technical Analysis: Daily Chart (February 2020 to February 2021) (Chart 2)EUR/CNH rates have their multi-week downtrend dating back to late-December 2020, having found support at the rising trendline from the April 2014 and February 2020 lows. The rebound likewise commenced near the 76.4% Fibonacci retracement of the 2020 low/high range at 7.7332. Having burst through the 61.8% retracement at 7.8459, EUR/CNH rates appear poised to continue to climb to their pandemic downtrend from the August and December 2020 highs, which could coincide with a return to the late-January swing high at 7.9088.EUR/CNH rates are seeing bullish momentum improve, even if its daily EMA envelope is not yet fully in bullish sequential order. Daily Slow Stochastics are racing into overbought territory, a welcomed development for a bullish breakout, while daily MACD is rising rapidly towards its signal line while in bearish territory. Gains through 7.9088 would warn that a deeper setback in risk appetite is setting in across global financial markets, however.— Written by Christopher Vecchio, CFA, Senior Currency Strategist