CNH Under Pressure as FX Reserves Slump to Yearly Lows

USD/CNH TALKING POINTS

  • Chinese FX reserves suffer at the hands of global and local factors.
  • Interest rate differentials are hurting the Yuan.
  • USD/CNH primed for upside breakout.

CHINESE YUAN FUNDAMENTAL BACKDROP

The Chinese Yuan (offshore) depreciated against the US dollar this morning after the June release missed estimates (see calendar below). The $3.071T figure marks the lowest point since March 2020. Unsurprisingly, the fundamental backdrop does correlate with the decline as the divergence between the Peoples Bank of China (PBoC) holding rates constant and Federal Reserve‘s aggressive outlook continues to grow.

Coupled with recessionary fears and higher yields in the Unites States, investors are seeking out safe-haven assets in-line with the markets ‘risk-off’ sentiment. Rising COVID-19 cases in June has contributed to supply disruptions in mainland China resulting in mobility limitations leaving the Yuan exposed to further downside.

CHINA ECONOMIC CALENDAR

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

USD/CNH DAILY CHART

USD/CNH DAILY CHART

Chart prepared by Warren Venketas, IG

The immediate market reaction was relatively muted but incrementally trudged higher towards the 6.7164 support zone. This key area of ​​inflection is definitely under threat should the fundamental backdrop remain thus bringing the symmetrical triangle (black) breakout into consideration.

Resistance levels:

  • Triangle resistance
  • 6.7164

Support levels:

  • 20-day EMA (purple)
  • 50-day EMA (blue)
  • Triangle support

Contact and follow Warren on Twitter: @WVenketas

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