Chinese yuan: close to the crucial level

Chinese yuan: close to the crucial level

The Chinese yuan has lost a lot since trade war tensions started escalating. However, not only the trade war has been affecting the currency but the strengthening of the USD. During this year, the Chinese yuan has become one of the worst performing Asian currencies. It has depreciated more than 9% against the dollar. On October 18, the USD/CNH pair reached highs of August 2018. And we see that the pair has been moving to the psychological level of 7.

Although the recent US Treasury's bi-annual report on currency policy declared that China isn’t marked as a currency manipulator (that is positive because currency manipulators usually meet sanctions from the US), the US said that it will closely monitor the currency policy of China. And traders should closely eye the Chinese currency too.

Up to date, we have a question: when is the end of the fall?

Every trader knows that when a market goes in the same direction for a long time, it might be a reversal soon. However, considering the Chinese currency, we have many doubts about it.

Authoritative financial institutions keep cutting forecasts for the Chinese economic growth and the Chinese yuan.

According to the forecast of the UBS Group, the Chinese yuan will break the level of 7 by the end of the year.

Previously, several famous banks also cut their forecasts for the economic growth and the rise of the Chinese yuan. JPMorgan sees the USD/CNH at 7.01 by the end of December. Bank of America Merrill Lynch expects that the yuan will plunge by 2.5% by the next quarter.

Why is everyone so pessimistic about the Chinese currency?

First of all, the trade war tensions are intensifying. It’s not a secret that the trade war with the US has already affected the Chinese economy. Indicators of the economic health are going down. China’s current account surplus is declining, or even drops into deficit.

What is worse for the Chinese yuan is comments of the People’s Bank of China. The Governor of the central bank said that the volatility of the Chinese yuan is normal and the currency is at a reasonable level. If the central bank doesn’t see any threats for the domestic currency, how can we expect its recovery?

What levels should we expect?

As we can see, financial institutions anticipate a rise of the USD/CNH above 7 by the end of the year. But what about closer levels?

As soon as the pair breaks above 6.9579, we can anticipate a further rise to 6.9875. A break of the last resistance will be crucial for the Chinese yuan and it will be a sign that the pair will stick above 7.0. However, if the USD loses its strength again, the Chinese yuan will get a chance to recover. The support is at 6.9050. The next one is at 6.8680. And of course, 6.8245 will become a crucial level for the pair.

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