JamesHelliwell

Yuan weakness is not being confirmed by divergent Dim Sum bonds

FX_IDC:USDCNH   US DOLLAR / CNH
USDCNH may be due for a correction towards 6.60.

The Yuan has weakened to 6.70 per dollar and the pair appears overbought on a weekly and daily basis. Having failed to provide a confirmatory close above this key level, we may see a correction towards the 38% Fibonacci retracement level standing at 6.6056

In the meantime, the highly correlated Dim Sum bond ETF (inverted) has failed to make higher-highs in sync with the USDCNH             rate's attempt. Combined with negative RSI divergence on the weekly chart, it may be foolish to buy before we see confirmation from the bond market or technical retracement to 6.6056 or lower.

Disclosure: Long USDCNH             remains one of my high-conviction ideas and has been a core position
Comment: Chinese GDP came in better than expected, supported by consumer spending. Crucially, annual GDP growth appears to be stabilizing at 6.7%, which is above the government's 6.5% minimum target.

This does not add to the case for further stimulus presiding over a devaluation of the Yuan, so for now I expect expectations to normalise having extended prices to temporarily overbought conditions.

Keep an eye on the DSUM bonds going forward (blue line, inverted) to provide an indication of the likely short-medium trajectory of USDCNH.
Comment: The market remains close to overbought on both the weekly and daily RSI (with bearish divergence on the former, unless we print a higher-high on the weekly RSI exceeding 78.51).

However...

Given the strengthening of the US dollar in today's session, and just as crucially, a decline in the DSUM bond etf (blue line, inverted) which had contested further weakening in the Yuan, an impulsive move above 6.70 appears imminent.

If the price does break 6.70 in the immediate term, then one should keep a close eye on the weekly and daily RSI indicators. If we register a new high with a peak RSI reading below 78.51, then this will cap a 12-month bearish divergence on the widely-used momentum indicator suggesting a market vulnerable to an imminent correction.

Time will tell but it looks as though prices will head higher past 6.70 in the next 1-2 weeks before momentum may become exhausted and herald a correction in price (new retracement levels may need to be calculated, otherwise 6.6057 remains the minimum downside target).
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