Chinese Yuan Technical Outlook: USD/CNH Upside Capped?

Chinese Yuan, US Dollar, USD/CNH – Technical Outlook:

• USD/CNH’s broader (downward) correction may not be over
• USD/CNH is now running into crucial resistance
• What is the outlook and what are the signposts to watch?

USD/CNH SHORT-TERM TECHNICAL FORECAST – SLIGHTLY BEARISH

USD/CNH’s rise above immediate resistance last week may have reduced imminent downside risks but it hasn’t altered the broader ongoing correction phase.

USD/CNH has broken above tough converged resistance: the November 21 high of 7.18, the 200-period moving average, and the 89-period moving average on the 240-minute charts. The shorter moving average has served as an important barrier since the downward correction began earlier this month.

USD/CNH Daily Chart

Chart Created Using TradingView

Importantly, the piercing of the resistance has reduced the odds ofscenario 2 highlighted in the previous update, that is, it has lowered imminent downside risks. However, unless USD/CNH can comfortably stay above the November 9 high of 7.28, those risks appear to be at best deferred than eliminated.

At the moment, the pair is struggling to rise past the 200-period moving average on the 240-minute charts. Moreover, a negative momentum divergence (rising price associated with declining momentum) on the 240-minute chart suggests that USD/CNH’s rebound this month is running out of steam.

USD/CNH 240-minutes Chart

Chart Created Using TradingView

A key signpost to watch for a renewed decline would be a fall below the immediate cushion at Monday’s low of 7.20, coinciding with a horizontal trendline from November 17. Such a break would trigger a minor double top (Monday highs), pointing to a potential decline toward 7.15. Importantly, the development would raise the chances of a broader range scenario in the interim. In any case, the mid-November low of 7.02 is quite a strong floor to crack.

An alternate scenario is where USD/CNH breaks past the initial barrier at 7.28 to retest the October high of 7.37. The odds of such a scenario appear to be low nevertheless.

— Written by Manish Jaradi, Strategist for DailyFX.com