Is this the beginning of the big Yuan reversal?

Donald Trump and Xi Jinping have boosted the prospect of a trade negotiation breakthrough after a successful G20 meeting. Could this spark the beginning of a bearish reversal for USD/CNH?

Yuan
Source: Bloomberg

The breakthrough between the US and China this weekend has provided a substantial boost for China-related markets, with the likes of the yuan and Australian dollar faring particularly well in the FX space. The yuan in particular has been the best barometer of where markets think the trade negotiations are heading, with the 10% tariffs implemented by Trump sparking a 10% rise in USD/CNH.

For the most part, we have seen precious few signs of a breakthrough, with the yuan devaluation proving very stable over the past eight months. However, the breakdown in trade relations between the world’s two biggest economies will not last forever, and when that breakthrough does occur, the USD/CNH trade is likely to turn on its head swiftly.

With the US and China having seemingly made some headway over the weekend, we are starting to see those green shoots which traders are likely to jump on unless told otherwise. The decision to allow a 90-day reprieve from heightened sanctions may not be the complete reversal that would likely spark a massive reversal. However, we are seeing signs that this could be the beginning of the end to this US-China trade spat.

Firstly, the meeting has seen the Chinese reduce their 40% tariff on US automobiles, helping boost goodwill between the two sides. US President Donald Trump is quoted as saying, 'China has agreed to reduce and remove tariffs on cars coming into China from the US. Currently the tariff is 40%'

Trump has also laid out potential benefits for the farming industry, with China opening themselves up to agricultural products from the US. He goes on to say, 'farmers will be a very BIG and FAST beneficiary of our deal with China. They intend to start purchasing agricultural product immediately. We make the finest and cleanest product in the world, and that is what China wants. Farmers, I LOVE YOU!'

Both outcomes from the meeting raise optimism for future trade, also improving optimism around the negotiations process. Finally, we saw the US president tweet that relations between the two sides have improved markedly, furthering the bullish yuan story. According to Trump, 'President Xi and I have a very strong and personal relationship. He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations. A solution for North Korea is a great thing for China and ALL!'

While we may not have had the major breakthrough that would spark the ramp up in yuan buying, we now have three months where we see both sides work towards a solution. This could be the start of that reversal process.

The weekly chart below highlights the fact that the pair has managed to rally back into the critical resistance level of 6.9874. That would be the perfect area for the market to reverse from. Looking at the market from this perspective, the rise for the pair is slowing in it’s ascent, with the price falling towards the key 6.8525 swing low.

That 6.8525 level is going to be key going forward, with a break below pointing towards a bearish phase coming into play. Today has seen the pair post a bearish breakdown from a triangle formation, adding a greater bearish influence. While a break below that 6.8525 level would bring about a more bearish outlook, it could take a tangible breakthrough between the two sides to spark a sharp ramp-up in downside volatility. However, this phase is likely to see that bearish USD/CNH story gather pace if this optimistic tone continues to improve.

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