USD/CNH: Sellers in charge now, bearish trend may accelerate
Like many emerging market currencies, US dollar remains the key driver for the price action of USD/CNH. As shown below, there is a strong positive correlation between the US dollar index (DXY) and USD/CNH.
US dollar has enjoyed significant gains since Fed started the tightening cycle in March 2022. The stubbornly high inflation has pushed Fed to raise interest rates aggressively, driving US dollar rising to multi-decade highs in last September. However, US dollar has top out since then as the market priced rates expectation via Fed Future Contracts reached a plateau until recently.
For broader outlooks, market participants are now expecting that Fed is approaching the end of rate hikes and a pivot may not far with potential rate cuts in Q3 2023.
Over the past 48 hours, the expectations about the monetary policy outlook shifted in a more dovish direction due to a softer wage growth in NFP report and the collapse of Silicon Valley Bank (SVB). On Monday morning, Goldman Sachs economists said their latest speculation is that FOMC may not deliver a rate hike at its meeting next week. The dramatic shift in monetary policy expectation casts a shadow over US dollar outlook.
Look forward, inflation pressure is still a threat to US economy in 2023 as US CPI seems stickier than previously thought. With the effort of a historically aggressive Fed, US inflation has shown signs of easing. That said, the annual rate of US core CPI for January is 5.4%, far above the Fed's 2 percent goal.
From China’s side, China's official manufacturing PMI for February hit 52.6, marked the highest reading since April 2012. The solid data showed the continuing recovery of economic activities after China lifted its covid restrictions at the end of 2022.
As the world’s second-largest economy, China has set its annual GDP target at around 5% for 2023, slightly lower than the 5.5% of last year. China’s new premier Li Qiang said that macro economic policy would focus on stability this year, delivering more growth confidence to the market.
Compared with the U.S., China’s modest inflation pressures provide it a better position to further stimulate the economic growth. With that in mind, China’s economy may have bigger room to recover in the coming months, which will support Yuan to gain some upward momentum.
From a technical perspective, USD/CNH pulled back after being rejected by the neckline of a big Head-and-Shoulder Pattern on the daily chart, which is a familiar resistance around 7.0000 psychological level. The price actions point to leg lower as dollar remains weak. The immediate support can be found at 6.7966, a break below may bring the focus to the swing lows near 6.7000 and the prior inflection level at 0.6600.
US dollar has enjoyed significant gains since Fed started the tightening cycle in March 2022. The stubbornly high inflation has pushed Fed to raise interest rates aggressively, driving US dollar rising to multi-decade highs in last September. However, US dollar has top out since then as the market priced rates expectation via Fed Future Contracts reached a plateau until recently.
For broader outlooks, market participants are now expecting that Fed is approaching the end of rate hikes and a pivot may not far with potential rate cuts in Q3 2023.
Over the past 48 hours, the expectations about the monetary policy outlook shifted in a more dovish direction due to a softer wage growth in NFP report and the collapse of Silicon Valley Bank (SVB). On Monday morning, Goldman Sachs economists said their latest speculation is that FOMC may not deliver a rate hike at its meeting next week. The dramatic shift in monetary policy expectation casts a shadow over US dollar outlook.
Look forward, inflation pressure is still a threat to US economy in 2023 as US CPI seems stickier than previously thought. With the effort of a historically aggressive Fed, US inflation has shown signs of easing. That said, the annual rate of US core CPI for January is 5.4%, far above the Fed's 2 percent goal.
From China’s side, China's official manufacturing PMI for February hit 52.6, marked the highest reading since April 2012. The solid data showed the continuing recovery of economic activities after China lifted its covid restrictions at the end of 2022.
As the world’s second-largest economy, China has set its annual GDP target at around 5% for 2023, slightly lower than the 5.5% of last year. China’s new premier Li Qiang said that macro economic policy would focus on stability this year, delivering more growth confidence to the market.
Compared with the U.S., China’s modest inflation pressures provide it a better position to further stimulate the economic growth. With that in mind, China’s economy may have bigger room to recover in the coming months, which will support Yuan to gain some upward momentum.
From a technical perspective, USD/CNH pulled back after being rejected by the neckline of a big Head-and-Shoulder Pattern on the daily chart, which is a familiar resistance around 7.0000 psychological level. The price actions point to leg lower as dollar remains weak. The immediate support can be found at 6.7966, a break below may bring the focus to the swing lows near 6.7000 and the prior inflection level at 0.6600.