USD/CNH: Waving the All-Clear Flag?
Matt Weller, CFA, CMT January 15, 2020 1:06 AM
From a geopolitical perspective, this week’s biggest event is the planned signing of the Phase One” trade deal between the US and China, scheduled for Wednesday’s US session.
The market has cheered the recent progress toward an initial deal, especially as it deterred further tariffs between the two countries, but readers would be wise to remember that the majority of the imposed tariffs remain in place. And, as Bloomberg reported earlier today, those tariffs are likely to stay in place until after the US presidential election in November as the US evaluates China’s compliance with the agreement. US Trade Representative Lighthizer and Treasury Secretary Mnuchin made this explicit, noting that “[t]here are no other oral or written agreements between the U.S. and China on these matters, and there is no agreement for future reduction in tariffs.”
In other words, trade policy is still a “brake” on global growth, albeit one that is no longer being pressed as hard.
The headlines reminded traders how far apart the US and China are from a comprehensive agreement, erasing the morning gains in US stock indices. In the FX market, the USD/CNH exchange rate has been a key barometer of health of the US-China relationship, and it recently fell to its lowest level since mid-July, signaling general optimism:
Source: TradingView, GAIN Capital
While rates are ticking higher after today’s headlines, the pair remains in a textbook downtrend, with a clear string of lower lows and lower highs since the early September peak near 7.20. Therefore, if we see a “buy the rumor, sell the fact” trade in the yuan on the signing of the trade deal, traders may favor selling bounces back toward the key 6.95 level later this week. Alternatively, a move all the way back above 7.00 would suggest that the situation is re-escalating and shift the bias in favor of the bulls.
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.