Over two consecutive years, the Chinese Yuan faced depreciation against the Greenback, fuelled by a post-pandemic recovery in China marked by turbulence.
Amidst this backdrop, the fiscal policies of the two economic powerhouses diverged starkly. While Chinese policymakers pursued monetary easing strategies in response to contracting economic activity, compounded by manufacturing activity declining for a third consecutive month in December, the Federal Reserve adopted a contrasting stance, tightening monetary policies in response to aggressive inflation.
This juxtaposition led to a divergence in yields between the two economies, with the US dollar garnering favour due to its higher yields, leading to a 3.02% surge in the USDCNH currency pair in 2023. However, as market sentiment shifted, recent months witnessed a weakening of the Greenback. Markets now anticipaate an 85% chance of the Federal Reserve easing rates in response to moderated price pressures as soon as March. Amidst anticipation of the Fed’s next moves, highlighted by upcoming economic data like job openings and Nonfarm payrolls, the USDCNH’s trajectory becomes a focal point.
As the Greenback weakened in recent weeks, the USDCNH currency pair embarked on a downward trajectory, dipping below the 100-day moving average and navigating within a descending channel pattern.
At the 7.16036 resistance level, downward pressure within this channel intensified, steering the pair lower. However, the confines of this descending channel imposed a limit on the downside momentum. The lower boundary of the pattern offered a lifeline as oversold conditions emerged on the Relative Strength Index (RSI), paving the way for a reversal.
Witnessing a bounce from the lower boundary, the pair surged, carving out a support level at 7.08704. The 61.80% Fibonacci Retracement Golden Ratio has now stepped into the spotlight, acting as a potential pivot point for price movement. Should a surge in volume accompany a breakthrough above this Golden Ratio, it might signal heightened interest in the upside, potentially leaving the 7.16036 level probable. Conversely, if the Golden Ratio asserts itself as a resistance point, attention may pivot back to the 7.08704 support level.
The USDCNH’s journey, marked by the Yuan’s prior depreciation against the Greenback, reflected divergent economic policies. While market sentiment swayed the Greenback’s recent weakening, upcoming economic data releases will likely steer the pair. Technical cues point to pivotal levels at the 7.16036 and 7.08704 levels, potentially guiding the pair.
Sources: National Bureau of Statistics of China, CME, Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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