USD/CNH: mid-term outlook

USD/CNH: mid-term outlook

2020-06-04 • Updated

Fundamentals

Recently, the US announced that flights from China will be suspended starting June 16. This is another step down in the relations between the US and China, and the trend doesn’t seem optimistic currently. What are the implications for the USD/CNH?

As the world’s reserve currency, the USD gains value as long as the fears prevail over hopes for a better future in the market. Logically, any worsening of the Sino-American relations dumps those hopes and fuels fears, supporting the USD against other currencies. However, as a national American currency, the USD may lose value on disappointing fundamentals coming from inside of the US. The current domestic disturbances may present such a threat in case they become significant and consistent enough to undermine the economic prosperity of the country. Until then, however, the USD as the currency representing the economy of the US is safe as long as the economy is functioning well.

Now, the direction in which the US-China relations are developing is pretty cloudy. The current economic rhetoric of the US President Donald Trump is more protectionist than anything else, even if it appears aggressive in tactics. In this context, the USD may keep rising at least until the November election as exploiting national and foreign images is essential for the presidential campaign, and there is no bigger element in this game than China to the US President. In other words, we may see more tension between the two countries, and therefore, the higher value of the USD against other currencies – including the CNH. The latter, however, puts limitations to the US political and economic maneuvers as the US President mentioned many times that he doesn’t want to see a cheap Chinese yuan against a strong US dollar because this harms the US exports. Therefore, strategically, we may see the appreciation of the US dollar, but against the CNH specifically, it will hardly be let go significantly higher than the critical 7.0.

Technicals

Since the US-China trade reconciliation process got into its final stages, the USD started dropping value against the CNH. From almost 7.20 in September 2019, it went down to 6.86 in January 2020 when the Trade Agreement was signed. But then, the virus stroke, the US-China relationship bumped into the alleged Chinese virus mismanagement, and currently, Hong-Kong. Eventually, the USD-CNH got back up to test 7.20. That is a critical level for the US dollar against the Chinese yuan, hence we are likely to see a fierce battle at the resistance of 7.20. Very likely, the USD/CNH will bounce downward from that level as it has strategic importance and will have profound implications for the US economy if it is breached. Currently, it already went into a retrace to trade at 7.1 but that is likely a short-term correction. We are going to see further rise of the USD/CNH, and that is goign to be as tensed at 7.2 as the US-China relations are. For this reason, keep an eye on that level and watch for further announcements from the American and Chinese authorities in view of their relationship.

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