USD/CNH FX Futures: Yuan Bears a reflection of China's woes
The PBOC has repeatedly fixed its daily reference rate for the onshore yuan (CNY) at levels below estimates. But measures from the PBoC to support the Yuan has not been effective in changing the trend amidst a slew of economic stress (property slump, rising unemployment, deflation fears, etc) that may drive the offshore yuan (CNH) to historic lows.
The latest USD/CNY fixing on 28 August was set 989 pips below estimates, at 7.1856, the strongest level since August 15. At the same time, authorities announced a reduction of stamp duty on stock trades which served to briefly boost the yuan.
However, we continue seeing depreciation pressure for the yuan as the fundamental factors of yield differential and economic weakness have not changed.
On a fundamental perspective, we think that the PBoC does not want Yuan weakness beyond the 7.30 level for USD/CNH. But with the PBoC forced to cut rates to stimulate growth, it will continue to weigh on the Chinese currency.
On the other hand, USD strength should stick as the "higher for longer" interest rate narrative gains traction.
Unless economic woes in China improve, we see 7.5500 as a reasonable target level for USD/CNH. See trade setup below:
• Entry Level: 7.2900
• Target Level: 7.5500
• Stop Loss Level: 7.1850
• Reward: Risk Ratio: 2.46x
- Danish Lim Zhi Lin, Investment Analyst
The latest USD/CNY fixing on 28 August was set 989 pips below estimates, at 7.1856, the strongest level since August 15. At the same time, authorities announced a reduction of stamp duty on stock trades which served to briefly boost the yuan.
However, we continue seeing depreciation pressure for the yuan as the fundamental factors of yield differential and economic weakness have not changed.
On a fundamental perspective, we think that the PBoC does not want Yuan weakness beyond the 7.30 level for USD/CNH. But with the PBoC forced to cut rates to stimulate growth, it will continue to weigh on the Chinese currency.
On the other hand, USD strength should stick as the "higher for longer" interest rate narrative gains traction.
Unless economic woes in China improve, we see 7.5500 as a reasonable target level for USD/CNH. See trade setup below:
• Entry Level: 7.2900
• Target Level: 7.5500
• Stop Loss Level: 7.1850
• Reward: Risk Ratio: 2.46x
- Danish Lim Zhi Lin, Investment Analyst