US Dollar Continues to Consolidate Against Chinese Yuan

Kate Leaman
Kate Leaman

22 October 2019

3 min read

Yuan down

  • US dollar forming triangle against yuan
  • Sitting just below the 50-day EMA
  • Sitting on top of trend line

The US dollar trading against the Chinese yuan is one of the more important currency pairs to watch currently, because of the US-China trade situation that we find ourselves in. It is simply one headline after another that contradicts the previous one, therefore it should continue to be very noisy.

However, what’s most important to pay attention to in this currency pair is the fact that the market is above the 7 CNH level. That is a huge psychological barrier that had recently been overcome by the bullish, and it suggests that we will probably continue to see the US dollar strengthened. Certainly, that will be the case as long as there is concern about the trade situation between the two economies.

Manipulated or not?

There is a lot of rhetoric out there that the Chinese manipulate their currency to lower levels. While this may have been true in the past when trying to build an export-driven economy, the reality is that the Chinese do not want a horribly weak currency. This is because so much Chinese debt is denominated in US dollars that it becomes more and more expensive as the yuan loses value.

the reality is that the Chinese do not want a horribly weak currency

Simply put, they need to convert more of their own currency into those dollars to pay these loans back. In that sense, concerns about the Chinese central bank getting involved shouldn’t enter your trading decision.

Technical analysis

USD/CNH yearly chart

The technical analysis in the market is relatively straightforward. The currency pair is sitting at the 38.2% Fibonacci retracement level from the most recent move higher, and at the bottom of the massive wedge that is forming.

Most of the time, these wedges and other consolidation formations after a move will signal continuation. It is because of this that the market is more likely to go higher than lower.

Furthermore, there is also a trend line that the market would be approaching even if it did break down below the bottom of the wedge, which lines up quite nicely with the 50% Fibonacci retracement level. In other words, there’s a good chance that buyers will return sooner rather than later.

On the negative side, however, the market has made a lower high and is currently trading underneath the 50-day EMA. What this probably suggests is that the market is going to offer more consolidation, going further before making a move.

Using the trend lines on the chart gives you a bit of a guideline as to where the currency pair can go. Obviously, headlines can and will come out to move the pair, so don’t be surprised if there is a sudden shift.

All things being equal, though, the market is in a longer-term uptrend, and that has not changed. It seems as if it is simply treading water in this consolidation wedge, trying to figure out where the trade negotiations and rhetoric lead us next.

Kate Leaman
Written By
Kate Leaman

With over 10 years experience as a trade news writer, Kate is our FX and commodities expert. Kate is also a talented voice over artist and BBC TV presenter, mother of two and yoga fan.

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