US Dollar May Rise Against the Chinese Yuan, but USD/CNH First Needs to Find Support

Chinese Yuan Remains Vulnerable to Slowing Global Growth

The US Dollar has been taking a dive against the Chinese Yuan of late. This is leaving USD/CNH heading for its third weekly decline if losses hold until Friday. That would be the worst losing streak since April 2021. On top of this, the pair is down about 4 percent this month, the most since the pair began trading in 2012. Is this the pair’s turning point? Or has USD/CNH overcorrected?

On Tuesday, China released a couple of key economic metrics for October. These included fixed asset investments, industrial production and retail sales. In the image below, all of them disappointed compared to economists’ expectations. In particular, retail sales fell 0.5% y/y versus 1% seen. These were not great and continued to show that certain corners of the country are struggling.

China is a heavily outward-facing economy due to key trading relationships with the rest of the world. As forecasted in my top trading opportunity for the fourth quarter, “as global growth slows (which is the likely scenario going forward), the Chinese Yuan could continue running into trouble.” Perhaps some of this was reflected in Tuesday’s set of data.

For my Q4 top trading opportunity, I used a multiple linear regression model to estimate that USD/CNH might aim towards 7.15 in the coming months. This is based on control variables such as Chinese exports, CPI, retail sales, G20 real GDP and more. Given the latest downturn in USD/CNH, the price dropped below this level. As such, it may be that a turn higher becomes the increasingly likelier outcome down the road.

Chinese Industrial Output and Retail Sales Disappoint for October

Chinese Industrial Output and Retail Sales Disappoint for October

USD/CNH Technical Analysis

Unlike the fundamentals, it might be too soon to call a bullish reversal for USD/CNH from a technical standpoint. The pair has confirmed a breakout under the August rising trendline, which is quite bearish. Prices are fast approaching the early October low at 7.0128 without clear signs of slowing, or a support level reinforcing. The 100-day Simple Moving Average is also nearing. The latter may reinstate the dominant upside focus. Until a clear bullish technical signal is made present, the fundamentals may have to step aside for the time being.

Daily Chart

USD/CNH Technical Analysis

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