Chapter 12  USDCNH: Internal and External Factors Intertwined, the RMB Is Under Pressure(7.06)


During the Asian session on Thursday (July 6), USDCNH traded around 7.2098, up 130 bps from the previous reading, and is currently trading around 7.2571. Affected by the hawkish Fed minutes, the Dollar Index rose yesterday, which has driven the RMB to depreciate slightly and rush to around 7.2650 again, with signs of hitting last week's high of 7.2850. During the day today, USDCNH followed the retreatment of the Dollar and also began to retrace to 7.2550. As important statistics are going to release tonight, there will be expected to break through 7.2850 if the data is positive for the dollar. On the contrary, the price will still continue the pull back to around 7.2200.

Key data for investors to watch: US ADP employment data for June (commonly known as "small Non-Farms"), changes in US jobless claims, US JOLTs job openings for May, and ISM non-manufacturing PMI data for June.

Overall: The US economic data generally exceeded expectations in June. Fed rate hike expectations change with the release of "hawkish" signals from Fed officials. The inversion of the Sino-US interest rate differential deepened under the Sino-US monetary policy difference. As China's economic fundamentals repair marginally weak, coupled with seasonal foreign exchange purchase demand, these factors have combined to put depreciation pressure on the RMB exchange rate. What’s more, the short-term resilience of the US economy and the hawkish tone of the Fed's interest rate hike may support the US dollar index, which has weighed on the RMB exchange rate to depreciate as well. However, as the Fed's rate hike draws to a close, the upward impetus of the dollar index will be gradually released, and expectations are gradually being fulfilled. Currently, it is only a matter of time before economic fundamentals improve, with the continuous release of China's domestic policies such as a stable exchange rate and stable economy. Therefore, the exchange rate will eventually show two-way volatility. According to the current position of USDCNH, investors are recommended to focus on long positions without actions and still maintain small stop losses to go short at highs.

Technical Analysis

Trading at the daily timeframe, The RMB extends its bearish trend last week and updated its previous high. 7.30 is the previous strong resistance level, but also the level where regulators can manage. Since May till now, the RMB has walked out of a wave of unilateral depreciation trend with a comfortable upward slope, while two-way fluctuations during this period only exist in writing. However, after hitting a high of 7.2850 on June 30, USDCNH began to retrace followed by a high Doji Star. Afterwards, the price appeared 2 black bodies in succession and reached the lowest correction at the 7.2150 line. Subsequently, USDCNH has risen again, partially showing signs to form a small "M" pattern, which is still too early to tell. It is still necessary to wait for the confirmation of the pullback after the upward to the high. Currently, USDCNH stands above MA5, MA10, and MA20 again, with moving averages still divergent and the short-term resistance still upward. However, as the area above is strong resistance at present, the room for rushing higher may be relatively limited. Coupled with the high death cross of the MACD indicator, which is also in the overbought zone, investors should be wary of the retracement risk of price after rushing high.  

It is recommended that investors go short at highs. When the price rushes to the 7.285 line, traders can seize the opportunity to take a small short position, with the stop loss setting at 7.3050. The first target is the 7.22 line, where part of the profit can be taken. The remaining positions can be set to break even, and the second target is to see the 7.19 line.

USDCNH: Internal and External Factors Intertwined, the RMB Is Under Pressure(7.06)-Pic no.1

Trading Recommendations

Trading Direction: Short

Entry Price: 7.285

Target Price: 7.190

Stop Loss: 7.305

Support: 7.232/7.190

Resistance: 7.285/7.362

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