CNY gains may bring pain

At Tricio we look at charts in order to help gauge investor behaviour and sentiment. USD/CNY (long-term chart below) trades as a currency basket or a ‘dirty snake’ sort of regime vs. key currencies set by the central bank. We have sporadically looked for the CNY to weaken vs. the USD, arguing that a push to CNY 7.30 could be followed by a break to CNY 7.8. We have been right on a few occasions (CNY 7.30 approached or broken) but at the moment the USD is on a backfoot and the sustained turn below CNY 7.00 is opening CNY 6.70/6.50 risk.

The short-term USD/CNY chart below (weekly with 13 and 50-week moving averages) underlines this risk, with rising line USD support coming in just below CNY 6.50. We don’t favour such a strong CNY but this bears watching, with a pullback above CNY 7 needed to signal that the soft USD trend may be turning.

A strong CNY does not help the PBOC fight disinflation/deflation pressures. It also leans against export growth, and in general could dampen the necessary efforts to lift the economy. But with the actions by the Trump administration in the US seen as lifting China’s prospects (China is seen as a more stable partner for some countries, more trade deals and investment etc.) then the pressure on the CNY to firm further this year may be difficult to reverse. Watch the key cross rates of CNY/JPY and CNY/KRW for other clues as well.

We have argued in previous blogs/podcasts and research publications that Japan has gotten away with a super soft JPY since the pandemic. The weekly chart below shows that the JPY weakness is extending and CNY gains towards Y25 could be in the works. We don’t favour this, but the trend break risk is high. The CNY would need to retreat below Y22 to soften the breakout, setting up a potential tumble back to the 50-week moving average near Y21.

A key cross rate to keep an eye on is CNY/KRW. The cross rate (chart below) has broken above KRW 200 on what looks like a sustained basis (top line area near KRW 202), which opens up the risk of CNY gains to the 2009 KRW 230+ area. Again, we are not looking for the CNY gains to surge much further, but a retreat below the top line will be needed to set up KRW 190/180 again if seen.

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Gerry Celaya

Chief Strategist