Over the next few months, we expect the Chinese yuan to gain significantly over the dollar.
We have been downbeat on the dollar since it May 28, when it completed a bearish pattern. We have since reiterated this sentiment many times, based on fundamental drivers such as employment and unchecked fiscal policy. There has been considerable chatter about the dollar’s losing its “emergency” status, while that of America’s biggest economic rival gains favor among international investors.
China has been pushing for dominance across the financial markets via its currency.
The ECB has allocated a growing portion of its reserves to the yuan over the past few years, with some asking whether the Chinese currency will replace the greenback as the primary global reserve currency.
Goldman Sachs predicts that the Chinese yuan will strengthen to 6.7 against the dollar in the next 12 months, from around 6.98 yuan currently, as the Chinese economy appears to be bouncing back from the coronavirus pandemic.
The technicals support the outlook for a USD/CNY reversal, perhaps one that's even significant and long-term.
The USD/CNY pair is easing for the third straight week. It's trading right above an uptrend line—supported by the 100 week MA—that has been in place since March 2018. While this line may prove to be a level of support that could send the price into a rebound, we expect any bounce to be temporary, after the pair completed a H&S top that had been forming since March.
The MACD, RSI and ROC all shown long-term negative divergences, falling since August, while the price was rising. The weakness in these indicators suggests the price won’t be able to sustain an ongoing climb.
The H&S was the first major breakdown, and created a target out of the January low at 6.8 yuan. Should supply overrun demand at that level, we’d be looking at a much more significant reversal, that of a double top that has been forming since August 2019.
For now, we’re looking at the short term.
Trading Strategies
Conservative traders would wait for a decisive break of the long-term uptrend line to short the pair.
Moderate traders would short upon a return to the neckline of the H&S, as well as a close below the long-term uptrend line.
Aggressive traders may enter a contrarian long position, counting on a return move.
Trade Sample
- Entry: 6.9880
- Stop-Loss: 6.9800
- Risk: 80 pips
- Target: 7.0200
- Reward: 320 pips
- Risk-Reward Ratio: 1:4