China's yuan moved higher earlier today, after the country's central bank, the People’s Bank of China, offered 258 billion yuan ($38 billion) to regional commercial lenders through its medium-term lending facility (TMLF), part of the government's efforts to encourage lending to small businesses and private companies in an effort to bolster growth.
Along with today's PBoC activity hopefully boosting Chinese economic growth, which is at its lowest level since 1990, there's a positive correlation between yuan strength and the U.S.-Sino trade talks. As we've discussed previously, it’s in China’s interest to strengthen the renminbi, whose weakness had provoked President Donald Trump to accuse the Chinese government of currency manipulation in addition to his targeting what he calls their unfair trade practices.
Though the yuan moved lower at time of publishing, technical signals indicate it could be headed higher.
The USDCNY pair has been trading within a descending channel since early December. The 50 DMA crossed below the 100 DMA, demonstrating current prices were weakening.
The crossover occurred atop the channel, confirming its technical significance. On the other hand, note that the 200 DMA has provided support for the pair since January 1, which required another attempt by bears in order to pierce it. A higher price provides sellers a better rate and creates the potential for downside momentum.
The RSI managed to penetrate its downtrend line since October 31 but fell back below it. The momentum indicator provided a negative divergence when falling as it moved against sharply rising prices in late June–late October. That’s when it started its descending channel.
Trading Strategies
Conservative traders would wait for the full potential correction to the channel top, which would both limit exposure and increase the potential reward. The full correction is 6.84, the channel top. After that they’d wait for evidence of supply, with at least one long, red candle engulfing a green or small candle of either color.
Moderate traders could also wait for a full correction, to limit exposure, but not necessarily for the channel’s integrity to be established. Alternatively, they could wait for the price to retest yesterday’s 6.8107 high resistance, when the price closes below today’s 6.7814 low, and then wait for a second pullback for a better entry.
Aggressive traders may either wait for the price to retest the resistance mentioned in the moderate section, or enter a trade now, provided they could afford the stop-loss, which would still afford them a minimum 1:3 risk-reward ratio.
Trade Sample
- Entry: 6.8010
- Stop-loss: 6.8110, above yesterday’s high
- Risk: 100 pips
- Target (NYSE:TGT): 6.7510, the January 14 entry price, the lowest body in the mid-January consolidation
- Reward: 500 pips
- Risk-Reward Ratio: 1:5