Forex Market

USDCNH: approaching the July 2020 peak

The USDCNH has recorded a nearly 7-month rally against the offshore Yuan, with this year’s low seen in February at 6.3046 (a level that was also a new low since April 2018). By yesterday’s close, the pair stood at the 7.05 handle, approaching the July 2020 peak of 7.075.

Expectations of an aggressive Fed rate hike at this week’s FOMC are keeping the US Dollar on the long side, while China’s “zero Covid” policy has forced a halt to business activity in its main economic hubs and has severely impacted growth. The European Chamber of Commerce recently warned that “China’s attractiveness as an investment centre is being eroded”.

Divergent monetary policies have also contributed to a “strong Dollar, weak Yuan” scenario. Last month, the People’s Bank of China also cut key interest rates in response to the rebound in the epidemic and the property crisis, a move that accelerated the depreciation of the Yuan against the Dollar, which fell by more than 3% in a single month. Yesterday, the central bank announced that it had left the loan prime rate (LPR) unchanged at 3.65% and 4.30% for the 1-year and 5-year periods respectively. In any case, some economists believe that the suspension of the PBOC’s monetary easing policy is only a short-term strategy, which is mainly intended to ease the pressure of capital outflows. They predict that the central bank will cut interest rates further later this year.

Figure 1: Probability of target rate for the September 2022 Fed meeting. Source: CME

On Thursday at 18:00 GMT  markets will focus on the Fed’s FOMC rate decision, with Fedwatch showing odds of 84% and 16% for the Fed to raise rates by 75 bps and 100 bps respectively, compared to 75% and 25% respectively a week ago. Half an hour after the resolution, Chairman Powell will also speak and his views and stance on the next economic and inflation outlook will be of interest.

Technical Analysis:

The US Dollar rose against the offshore Chinese Yuan (USDCNH) yesterday to the 7.00 handle and as of the time of writing, the pair extended its gains to around 7.06, approaching the July 2020 peak of 7.0750. The 6.94 to 7.00 area is key support. If the pair manages to close above this area at the end of the month, upside risks remain. The USDCNH is expected to continue to move up to 7.0750 and the 7.15 to 7.20 resistance area, followed by 7.29. Alternatively, if the pair falls below the 6.94 to 7.00 area, the pair could face a short-term technical correction and a move down to the next support at 6.85 (100-MA) and 6.75 (SMA).

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Larince Zhang

Market Analyst

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