Overview
The USD/CNH currency pair has been on a consistent downward trend since early November, dropping approximately 2500 pips from around 7.14 to approximately 6.88. This article explores the potential future levels to watch for this currency pair.
Chinese Yuan's Global Aspirations
Chinese President Xi Jinping has recently articulated plans to elevate the renminbi (yuan) to the status of a global reserve currency. He emphasized the need for a "strong currency widely used in international trade and foreign exchange," supported by a robust central bank capable of attracting investment and influencing global pricing.
Despite these ambitions, the yuan currently represents only about 2% of global foreign exchange reserves, indicating that any significant shift away from the US dollar will likely take decades rather than months or years.
Market Dynamics and Regulatory Actions
In a recent move, Chinese regulators have advised banks to decrease their holdings of US Treasury bonds due to concerns over concentration risk and market volatility. This action may slightly reduce the capital flows that have been supporting the US dollar, although the immediate impact on the market is expected to be minimal.
Nonetheless, China's aspirations for its currency, combined with regulatory guidance and the People's Bank of China's (PBOC) gradual adjustments to the exchange rate target, suggest that the trend of yuan appreciation may still be in its early stages.
Technical Analysis of USD/CNH
As illustrated in the daily chart of USD/CNH, the pair has been consistently moving lower within a bearish channel since November. The current trend shows a decline to around 6.88, with the potential for further decreases if the bearish momentum continues.
Traders are advised to be cautious when relying solely on technical analysis for a currency pair that is closely managed by a central bank. The path of least resistance appears to be downward, with significant support not expected until the March 2023 lows in the lower 6.80s. A break above the bearish channel and near-term moving averages around the 6.90 level would be necessary to shift the current bearish outlook.