USDCNH: Forex Yuan Analysis – Preparing for trade talks between China and US

By IFCMarkets

Preparing for the beginning of trade talks between China and the US

The Central Bank of China made a number of statements in support of the yuan before the resumption of US-China trade talks. Will USDCNH prices fall? Such a movement on the chart indicates the strengthening of the yuan.

Earlier, the Chinese currency has been weakening for 10 consecutive weeks, for the first time since the beginning of its regular trades in 1994. Trade negotiations between the US and China will be held on August 22-23, 2018. On August 21, representatives of the Chinese Central Bank (People’s Bank of China) said that the exchange rate of the yuan was not used as a “weapon” in foreign trade disagreements and was determined only by the balance of supply and demand. The economy of China is stable, which allows stabilizing the exchange rate. Earlier, US President Donald Trump accused Chinese authorities of manipulating the yuan. On Tuesday, August 21, he criticized the policy of rate hikes by the US Federal Reserve, which contributed to the weakening of the US dollar. According to Trump, the US needs to reduce the trade deficit, and the strong dollar could slow down the growth of US exports. The materials of the previous Fed meeting, which contain the regulator’s opinion on the future monetary policy, will be published this Wednesday, at 20-00 CET. They can affect the exchange rate of the US dollar. On Friday, Fed Chairman Jerome Powell is expected to speak at the economic symposium in Jackson Hole. In China, no significant economic data are expected to be published this week.

On the daily timeframe, USDCNH: D1 left the rising channel to move downwards. The further decrease is possible in case of successful negotiations between the US and China, as well as in case of any hints on easing of the monetary policy by the Fed.

• The Parabolic indicator gives a bearish signal.
• The Bollinger bands have widened, which indicates high volatility. The upper band is titled down.
• The RSI indicator is at 50. It has formed a weak negative divergence.
• The MACD indicator gives bearish signals.

The bearish momentum may develop in case USDCNH falls below its last fractal low at 6.8. This level may serve as an entry point. The initial stop loss may be placed above the last fractal high, the high since January 2017, the upper Bollinger band and the Parabolic signal at 6.96. Some market participants believe that 7 yuan per US dollar is a strong psychological resistance level. However, after 2008, the Chinese currency (the offshore renminbi) has not shown this level. The maximum of 2016 was 6.9868. After opening the pending order, we shall move the stop to the next fractal high following the Bollinger and Parabolic signals. Thus, we are changing the potential profit/loss to the breakeven point. More risk-averse traders may switch to the 4-hour chart after the trade and place there a stop loss moving it in the direction of the trade. If the price meets the stop level (6.96) without reaching the order (6.8), we recommend cancelling the position: the market sustains internal changes that were not taken into account.

Summary of technical analysis

Market Analysis provided by IFCMarkets