USD/CNH Forecast: New Year, Same Yu-an Strength

Chinese Yuan Key Points

• China senses an opportunity to boost the yuan’s profile given the US dollar’s recent struggles.
• The yuan still accounts for a miniscule 2% of FX reserves, so any progress toward dethroning the US dollar will likely be measured in decades, rather than months or years
• USD/CNH has been trending consistently lower within a bearish channel since the start of November, falling 2500 pips from near 7.14 to closer to 6.88 now – what are the levels to watch next?

Chinese President Xi Jinping started February out with a bang, outlining plans to turn the renminbi into a global reserve currency. In a journal, he asserted that China will establish “a strong currency widely used in international trade and foreign exchange,” with a “powerful central bank” and the ability to attract investment and influence global pricing.

Whether China will achieve this ambitious goal remains to be seen, especially given the export-reliant nature of its economy and tight capital controls, but it’s clear that the country senses an opportunity given the US dollar’s recent struggles. As the chart below shows, the yuan still accounts for a miniscule 2% of FX reserves, so any progress toward dethroning the US dollar will likely be measured in decades, rather than months or years:

Source: LSEG Datastream

Separately, Chinese regulators advised banks to reduce their allocations to US Treasury bonds last week due to concern over concentration risk and market volatility; at the margin, this reduces flows that were supporting the greenback, though again, the immediate market impact is likely to remain small. Regardless, between China’s currency aspirations, banking reserve guidance, and the PBOC’s gradual adjustment to the exchange rate target, the trend of yuan appreciation may still be in the early innings.

Chinese Yuan Technical Analysis: USD/CNH Daily Chart

 

Source: Tradingview, StoneX

Most Chinese traders are away from their desks for the New Year celebration this week, but that hasn’t stopped the yuan from rising. As the chart of the Hong-Kong traded version of the yuan (CNH) above shows, USD/CNH has been trending consistently lower within a bearish channel since the start of November, falling 2500 pips from near 7.14 to closer to 6.88 now.

Readers should be cautious about relying too heavily on technical analysis with a currency pair that is closely managed by a central bank, but the path of least resistance remains clearly to the downside at this point, with little in the way of previous support until the March 2023 lows in the lower 6.80s. Only a break above the bearish channel and near-term moving averages in the 6.90 zone would erase the near-term bearish bias.

-- Written by Matt Weller, Global Head of Research

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