Chinese Yuan Forecast: USD/CNH eyes record highs as trade tensions mount

• USD/CNH hovers just beneath 2022 record highs
• Chinese rhetoric hardens as tariff threats escalate
• AUD/USD bounces shallow, momentum still with the bears
• Yuan defence in focus as volatility risks grow

Summary

We’re nearing a key juncture in the trade war between the United States and China, putting increased emphasis on USD/CNH as it nears a critical technical level. If the war escalates, it could encourage Chinese policymakers to let the yuan weaken, creating a scenario that could easily see a resumption of the market turmoil seen either side of the weekend. Not only will this period be important for Chinese markets but also for other assets linked to the world’s second-largest economy, such as the Australian dollar.

Critical Moment in Trade War Nears

While the carnage in riskier assets may have died down relative to what was seen late last week, the lull may prove to be only temporary as we near the April 9 deadline for the U.S. to introduce additional 34% tariffs on Chinese imports. In response, China pledged on Friday to introduce new tariffs of the same size on U.S. imports from April 10—a move U.S. President Donald Trump warned on Monday could see an extra 50% duty applied, on top of the 34% tariffs, if China did not abandon the planned increase.

The early signs do not look good for compromise with Chinese embassy spokesperson Liu Pengyu stating Monday that pressuring or threatening China was not the right way to engage, and that China will firmly safeguard its legitimate rights and interests. That statement was followed up on Tuesday with China’s Commerce Ministry warning the nation will never accept the “blackmail nature” of the United States. Ominously, it suggested that if the U.S. is bent on having its own way, China will follow it to the end.

Weaponising the Yuan?

The question now is how Chinese policymakers will respond if the U.S. follows through with the threat, taking the effective tariff rate on Chinese imports into the States to well over 100%. Naturally, the Chinese yuan is heavily in focus, especially as it hovers just below key technical resistance.

Previously, China has moved to defend the yuan from acute depreciation pressure, rolling out numerous measures such as strong daily CNY fixings, outright dollar selling from state-backed banks, and short-dated bill sales to drain yuan liquidity and make it expensive to short. But will it continue to push back aggressively against strong market forces if its international competitiveness has suddenly been reduced? That’s clearly a significant risk if the trade war escalates, even if it were to increase the risk of capital outflow from within China.

USD/CNH Threatens Major Bullish Break

Source: TradingView

One look at the USD/CNH daily chart only reinforces just how critical the next few days may be, with the pair sitting just beneath the record highs set in September 2022. While it comes with the disclaimer that technical signals may be less trustworthy in these headline-driven markets, all the momentum is with the bulls, adding to the risk we could see a retest of this major resistance zone between 7.3680 to 7.3750. If the heavily defended level were to give way, it could result in an explosive move higher. For now, bids may emerge at 7.3000 and again below the 50-day moving average.

AUD/USD: China Sentiment Key

Source: TradingView

Given the tight inverse correlation that often exists between USD/CNH and AUD/USD, what happens with the yuan is especially important for the Aussie dollar. The technical picture for AUD/USD has been decimated by the moves in recent days, offering only limited relevance for those assessing directional risks.

Momentum signals are entirely with the bears, although RSI (14) is now starting to move higher from oversold conditions, suggesting it may be in the early stages of turning. For now, it favours selling rallies over buying dips, even if headlines supersede the signal in these conditions.

0.5932 is the first downside level of note, coinciding with where AUD/USD bottomed on Monday. A break of that would put the pandemic lows of 0.5510 on the radar. Bids may be encountered above 0.6100 near-term, with 0.6188 another topside level to note.

-- Written by David Scutt

Follow David on Twitter @scutty