Chinese yuan, stocks and commodities slump
Fawad Razaqzada April 25, 2022 12:31 PM
Just when you thought the c-word was no more a thing for the markets…
Well, here we are, more than 2 years into the pandemic and Covid is still roiling financial markets. Concerns about demand have intensified after Beijing locked down parts of Chaoyang District as the virus spread there. This triggered panic as people had hoped that lockdowns would ease in Shanghai rather than more restrictions being imposed elsewhere. But now the prospects of the capital city being put into a full lockdown has unnerved investors worldwide. Not only does this imply weaker demand from China, but it could reignite supply chain woes, further exacerbating inflationary pressures.
The Chinese yuan has fallen for the fifth day in a row, this time by more than 1%, lifting the USD/CNH to its highest level since November 2020. The Aussie and other commodity dollars have followed suit. Chinese equities dropped more than 5% overnight, with European and US futures also feeling the pain. Crude oil, copper and other metals all fell on demand concerns.
So, while the rest of the world’s largest economy are tightening belts, it looks like China might have to loosen its policy in order to keep its economy ticking over at the target rate in the second quarter. A couple of months ago, China set an economic growth target for the year of around 5.5%. This was the lowest level in more than a quarter-century of economic planning. But in light of the recent lockdowns, it might struggle to even achieve that target.
Indeed, fears over the Chinese economy saw the USD/CNH break out from a consolidation pattern last week, leading a big upsurge and follow-up technical buying in this pair (or selling in the yuan):
Source: StoneX and TradingView
For as long as the USD/CNH now remains above last week’s high at 6.5477, the short-term path of least resistance would be to the upside, meaning more weakness is likely for the yuan. From here, a move to the shaded region on the chart between 6.65 to 6.70 looks quite likely. Here, the 38.2% Fibonacci level meets prior support-turned-resistance area. I wouldn’t be surprised if this region were to offer only mild resistance, before the rally continues given expectations that monetary policy of the US will further diverge from that of China.
Disclaimer: 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. Before deciding to trade forex and commodity futures, 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 GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.