Daily Market Recap – USDCNH Yuan under pressure as PBOC eases monetary policy

Pressure is building on the Chinese yuan, which is back to a nearly three-month low against the greenback following disappointing Chinese inflation data and monetary policy easing by the People's Bank of China (PBOC).

Ex-factory inflation eased in June after the Chinese government took steps to combat soaring commodity prices. PPI rose 0.3 percent on a monthly basis, a sharp slowdown from May's 1.6 percent increase, due to lower copper and steel prices.

Official data also showed that China's consumer price index (CPI) rose 1.1 percent on a year-over-year basis in June, below expectations for a 1.3 percent increase.

The People's Bank of China (PBOC) announced on Friday that it will cut the reserve requirement ratio by 0.5 percentage points for most banks from July 15 to support the economy, which is hurt in the short term by rising prices and shortages of some inputs. The PBC said the move will free up about 1 trillion yuan ($154 billion) of long-term liquidity in the economy.

Meanwhile, the USDCNH is supported by the prospects of the Fed normalizing monetary policy. The Federal Reserve is expected to announce a reduction in its quantitative easing program at the next meeting on July 28 and implement the reduction at the following meeting in September.

In terms of technical analysis, the outlook for USDCNH has been turning bullish since last month after the exchange rate started to bounce off the bullish oblique line that runs through the 2014 and 2018 lows (black in the chart).

The weekly time unit RSI indicator is about to exceed 50% which signifies a bullish reversal in momentum and could precede a bullish acceleration in price as was the case in 2018.

The first resistance to watch will be the March high at around 6.58 and then the 2019 low at 6.67 exceeded late last year. Traders can look to enter long positions along the 20 day MA for a push towards 6.53 in the near run.

(Chart Source: Tradingview 12.07.2021)

The bullish outlook would be technically invalidated in the event of a pullback below the June low at 6.35.

Support & Resistance Levels:

R3 6.58284

R2 6.52936

R1 6.50000

S1 6.46750

S2 6.44200

S3 6.41000

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.