USD/CNH double top could pave the way for further downside

USD/CNH has dropped into a fresh 16-month low, with continued Chinese economic outperformance paving the way for further Yuan strength.

Chinese Yuan breakout brings strong USD/CNH decline

The Yuan has enjoyed a period of outperformance over the past three-months, with USD/CNH reversing from the June peak to establish ultimately complete a double top formation upon breaking below the 6.8456 level. There are plenty of potential drivers behind this move, with the wider dollar decline one of the most glaringly obvious reasons.

However, we have also seen significant Chinese economic outperformance, with this week’s improved retail sales, fixed asset investment, industrial production, and unemployment numbers providing a timely reminder that things are moving in the right direction. We are also looking at a reversal of the USD/CNH gains that came about through Trump’s hardline approach to US-China trade, with traders starting to realise that this approach could be reversed in the event that Biden gets into the White House.

From an intraday perspective, the declines seen in recent months have provided a consistent downtrend for traders. The four-hour chart highlights that trend, with the consolidation seen throughout the beginning of the month ultimately giving way to another leg lower. With that in mind, further weakness looks likely unless the pair break up through the 6.8610 resistance level.

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