Originally published by AxiTrader
It is going to be one heck of a move in the office yuan fix today after the US dollar lost ground across the board in the past 24 hours. The US dollar move was ignited by a surge in the pound, which then saw position squaring across the entire forex landscape. The US dollar fell in response, while the USDCNY collapsed from a high of 6.9033 yesterday to around 6.8520 this morning.
A big part of the US dollar move has been traders recognising the broader import of what president-elect Trump said about the level of the Chinese currency in his interview with the Wall Street Journal over the weekend.
Trump told the Wall Street Journal that even though he believes China is a currency manipulator he's not going to officially designate them that just yet.
But he added:
"Certainly they are manipulators...Instead of saying, ‘We’re devaluating our currency,’ they say, ‘Oh, our currency is dropping.’ It’s not dropping. They’re doing it on purpose.
Our companies can’t compete with them now because our currency is strong and it’s killing us."
These comments appear to have rattled forex traders and investors more broadly overnight once the pound started rallying.
But the good news for China is that a dollar selloff, and a rally in yuan, is actually a win-win for Trump and President Xi.
Speaking in Davos overnight Xi noted that globalisation had had its winners and losers but that to try to lock yourself away from it - as it appears Donald Trump's policy prescription may - would be to cut off your “light and air”. Xi also added – perhaps iron hand in a velvet glove style – “No one will emerge as a winner in a trade war”.
So a weaker USD/CNY might actually suit both nations in this feeling out period of the initial days of the Trump presidency - once he's sworn in on Friday that is.
Likewise a turn in the upward projection of USD/CNY and USDCNH releases pressure on China to fight capital flows seeking the protection of other currencies from the yuan weakness.
It's not to say the yuan has found bottom. But currencies are bi-directional and the signs are there that the USD/CNY may have turned both in a fundamental and technical sense for a little while.
Let's look at the technicals.
The USD/CNY has been in advancing higher on an ever steeper uptrend since the devaluation back in August 2015. But it has made a significant pullback from the recent high around 6.96.
As part of the pullback it has now also broken the steepest of the most recent uptrends from November to January (not shown on the chart below) and now the tentative trendline from Octobers gap higher with the move to 6.85 overnight.
Coincidentally 6.85 in USD/CNY terms is the 61.8% level - so 38.2% retracement - of the October/January move.
So the easy money has been made in this garden variety pullback. But a break of 6.85 opens the way to 6.8100/50 and if that breaks there is another trendline level and the 38.2% retracement level of the broader March/January move in the 6.78/79 area.
It all sounds like a long away from current levels. But a move to 6.78 is an appreciation of the yuan of just 1%.
Have a great day's trading