USD/CNH Technical Outlook: Is There More Upside?

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

• USD/CNH bounced back from last week and is now meeting stiff resistance
• Is there more upside in USD/CNH or is it headed for another leg lower?
• What is the outlook and what are the signposts to look for?

USD / CNH SHORT TERM TECHNICAL OUTLOOK – SLIGHTLY BASSY

The Chinese yuan’s slide against the US dollar since last week is showing signs of fatigue as it tries for a solid cushion.

USD/CNH, up more than 2% over the past week, now faces stiff convergence resistance: Thursday’s high of 7.18, the 200-period moving average, and the 89-period moving average on the 240-minute charts (the small bounce . earlier this month sold out at the shorter moving average). With a negative momentum divergence (rising price associated with declining momentum), USD/CNH could find it difficult to break the resistance at the moment. This follows a bounce from nearby support at the October low of 7.01 – a path highlighted in the previous update. Also, USD/CNH met the price target of a minor peak pattern triggered earlier this month.

USD/CNH 240-minute chart

Chart Created With TradingView

The bigger question: does the rebound from last week pave the way for USD/CNH to retest the October high of 7.37, or will the pair fall further before it retests the record high? Two scenarios could arise.

The first is a retracement to last week’s low of 7.02. An indication to watch for this scenario to play out would be a drop below immediate support at Friday’s low of 7.11. The support at 7.01-7.02 is crucial – a break below would trigger a head and shoulders pattern — the left shoulder is at the September high, the head is at the October high, the right shoulder would likely be this week’s high (still developing). ), pointing to a potential drop to the 200-day moving average (now at around 6.75).

USD/CNH Daily Chart

Chart Created With TradingView

The second scenario is where USD/CNH breaks above the immediate convergence resistance at 7.17-7.20. Such a break would confirm that the downward pressure has eased, paving the way for the October high.

USD/CNH Monthly Chart

Chart Created With TradingView

Which scenario are the odds leaning towards? the negative divergence (rising price associated with a halt or weakening of momentum) on the monthly and weekly chart highlighted in October suggests that the downward correction since October may not be over. That is, the probability of another leg lower – at least to last week’s low – remains high. Therefore, scenario 1 looks more likely. Having said that, a decisive break above 7.20 would negate this scenario.

— Written by Manish Jaradi, Strategist for DailyFX.com