USD/CNH: Illiquid Break Below 200DMA Faces Reality Check as China Returns

USD/CNH broke below 200DMA, key trendline and horizontal support on Friday
Move occurred in illiquid trade during mainland China’s May Day holidays
Monday's hammer candle hints at possible reversal, adding to the uncertainty
CNH moves could weigh heavily on AUD and NZD given near-perfect recent correlations
MACD and RSI suggest growing downside momentum—bearish setups favoured for now

Summary

An abrupt strengthening in the offshore traded Chinese yuan that saw it break several key technical levels in illiquid trade on Friday is about to be put to the test as mainland Chinese markets resume on Tuesday. What happens next could prove highly influential for the U.S. dollar’s fortunes against other Asian currencies, particularly the Australian and New Zealand dollars given the exceptionally tight correlations between the three against the greenback last week.

USD/CNH: Bear Trap or Start of Strengthening Trend

The sizeable bearish candle in USD/CNH on Friday was hard to miss, with the pair closing beneath the 200-day moving average, the December 2024 downtrend, and minor horizontal support at 7.2130. The price action hints USD/CNH may be on the cusp of a renewed CNH strengthening trend. But with the move coming at the start of the May Day holidays—a period typically marked by thin liquidity as mainland Chinese markets close for an extended long weekend—it’s a signal that demands scrutiny. It may ultimately prove a large bear trap as turnover normalises on Tuesday.

Source: TradingView

Monday’s hammer candle warns of reversal risk, though it too came amid holiday-affected trade. Should USD/CNH break and close back above the 200DMA today, it would suggest Friday’s move was a false break, opening the door to further upside—and downside for Asia FX more broadly. Correlations remain tight: on the daily timeframe over the past week, AUD and NZD logged correlation coefficients with CNH of 0.99 and 0.88 respectively—about as close to perfect as you’ll find.

Support sits at Monday’s low near 7.1850, followed by 7.1500 and 7.1000. Above the 200DMA, the April 4 low at 7.2393 is the first hurdle for bulls, with a break targeting the 50DMA.

Indicators such as MACD and RSI (14) point to increasing downside momentum, supporting a bearish bias. Selling rallies and downside breaks may remain the preferred strategy for now.

-- Written by David Scutt

Follow David on Twitter @scutty

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Products and services available depend on your location and the entity holding your account. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

Contracts for Difference (CFDs) are not available to US residents.

FOREX.com is a trading name of GAIN Capital - FOREX.com Canada Limited, 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA is a member of the Canadian Investment Regulatory Organization and Member of the Canadian Investor Protection Fund. GAIN Capital – FOREX.com Canada Limited is a wholly-owned subsidiary of StoneX Group Inc.

Complaints are taken very seriously at FOREX.com. You can view our complaints procedure here.

Know your advisor