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U.S. DOLLAR/CHINESE YUAN

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Once again emerging market currencies started weakening against the U.S. Dollar. Earlier update analyzed the Turkish Lira, South African Rand and Mexican Peso.  In this blog post I review the existing uptrend on USD/CNY.

U.S. Dollar/Chinese Yuan is reversing from a critical support level. Since the second half of 2015, USD/CNY has been recording higher highs and higher lows. First, a breakout above 6.26 followed by another strong breakout above 6.448, clearly established the strong dollar weak yuan trend. Last 4 months price action was possibly a pullback to the previously broken resistance at 6.448 and it might be over. Reversal from strong support area can be followed by another upward spike towards 6.65-6.70 area.

Weekly scale price chart of USD/CNY

Weekly scale price chart of USD/CNY

The daily scale chart shows the breakout from the last 4 months downward trend channel. As long as the USD/CNY remains above 6.45-6.50 area, strong USD weak CNY trend will remain intact in the second half of the year.

Daily scale price chart of USD/CNY

Daily scale price chart of USD/CNY

U.S. DOLLAR/CHINESE YUAN

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2016 can be another year of weak performance for the emerging markets. USD/CNY chart will have significant impact on emerging market currencies and equities. In the second half of 2015, sharp devaluation of the Yuan resulted in a sell-off in emerging market equities. Current technical outlook for the USD/CNY suggests further devaluation for the Chinese currency is likely in the coming months. A runaway price movement on USD/CNY can trigger another wave of selling in the emerging market equities.

USDCNY

MSCI EM

Already, emerging market equities are underperforming the developed markets. This trend is likely to continue if the above two (sharp devaluation of the Chinese Yuan and another sell-off in emerging market equities) takes place in the following months.

MSCI DM VS MSCI EM

US DOLLAR/INDIAN RUPEE

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China devalued its currency. This opened the door for further depreciation for the Chinese Yuan and also for currency wars between the Asian economies. Over the past two years emerging market currencies have performed poorly against the U.S. dollar. Weakness was mainly driven by commodity exporters. Now, strong U.S. dollar, weak emerging market currencies trend is spreading to Asia.

USDCNY

U.S. Dollar/Indian Rupee is preparing for a strong breakout from its 3 month-long consolidation range (rectangle chart pattern). On a larger scale, USD/INR formed a head and shoulder pattern. Both chart developments suggest weakness for Indian Rupee if the cross-rate clears 64.4 levels in the following days.

USDINR

Another weakening Asian currency is the Philippines Peso. Over the past two years, USD/PHP has been resilient though, following the breakout from its symmetrical triangle Peso has also started depreciating against the U.S. dollar.

USDPHP

USD/CNH (CHINESE YUAN OFFSHORE)

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Here is a detailed article that explains the difference between on shore and off shore Chinese Yuan.

http://www.businessinsider.com/onshore-and-offshore-renminbi-2014-2

I am analyzing the long-term base formation on the USD/CNH (Chinese Yuan Off Shore) in this update. I think this chart is important as we start reading more about currency wars. Cup & handle is a reversal pattern. In this case it is a bullish development and suggests higher levels for USD/CNH. In other words depreciation for the Chinese Yuan. Breakout above 6.27-6.30 area will confirm the 2 year-long base formation. Until the beginning of 2015, USD/CNH had lower lows and lower highs. In the last quarter of 2014, the low formed at a higher level. This could be the beginning of a change in trend.

USDCNH

CHINESE YUAN

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Still a highly managed currency Chinese yuan is trading above its 200 day moving average – with only one exception since 2005. China was criticized for currency manipulation during the financial crisis between 2008 and 2009. PBOC (The People’s Bank of China) was asked to strengthen the yuan and China to focus on internal demand rather than an export driven economy.

USDCNY

CHINA SSE 50 INDEX

In the second half of 2010, USD/CNY started moving lower resulting in weak U.S. dollar against the Chinese yuan. Over the past 4 years China lagged the global recovery. China SSE 50 index is now testing 2009 low levels. However, since the beginning of 2014, USD/CNY started moving in the opposite direction of the major downtrend. Similar price action occurred in the second half of 2012 but it was short-lived. Cross rate failed to hold above the long-term average.

Technical outlook could be different now. 6.1 levels will be an important threshold in the following months. Given that SSE 50 index is now very close to a major support both Chinese equities and the currency should be watched closely. If USD/CNY holds above the 200-day moving average, this will signal a major shift in the long-term trend.