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USD/CNH reversing amid US-China optimism

USD/CNH looks set for a market reversal, with markets clearly betting that there is light at the end of the tunnel for US-China trade talks.

This month’s US-China trade talks may have passed without any particular breakthrough, yet from a market perspective, the rush to catch the beginning of the huge eventual market move has started. This is according to the best barometer for US-China trade talks: USD/CNH. The Chinese yuan has been a huge mover throughout this trade war, with the 10% tariffs from the US being largely counteracted by a 12% devaluation for the yuan from the March high to the October low. With Chinese trade being targeted by the trade war, it comes as no surprise to see that the yuan has been the main target of selling as the trade war intensifies. However, today’s trade data from China goes some way to debunking that notion, with the China-US trade surplus reaching record highs. Perhaps there is reason to believe that part of the reasoning behind why markets have been buying or selling the yuan could be flawed.

Nevertheless, last week saw USD/CNH post the largest weekly decline since January 2017. Interestingly, that week marked the beginning of a 14-month decline for the pair. This begs the question of whether we have also seen a market top this time around.

Ultimately, the answer will come down to whether or not both sides can continue to make headway towards a deal. Markets do not need an immediate deal, as we have seen over the past month. Instead, some sense of progress should ensure that traders continue to trade in anticipation of an eventual deal.

USD/CNH weekly chart

Looking at the USD/CNH chart below, the rally back into that January 2017 peak provided us with the perfect reversal point for the pair, with a break below 6.8525 providing the first tangible signal that a reversal could be in the offing. We have since seen the price break below the 6.7816 mark to confirm a bearish turnaround is in play.

USD/CNH daily chart

Taking it down to the daily chart, we have seen a clear topping off in this pair, bringing about a five-month low. However, with Friday and today looking likely to post a tweezer reversal pattern, there is a chance that we could see some form of rebound in the coming days. The bullish shift in momentum on the stochastic oscillator highlights this same potential upside for the short term.

However, irrespective of whether we see such a rebound or not, this market looks likely to decline further throughout the coming weeks and months, with a break through the last swing high of 6.9248 required to negate this bearish view.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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