Diary of a Financier

CNY FX crosses: Yuan rally resumes, posing a threat to global risk

In Capital Markets, Economics on Mon 9 Nov 2015 at 14:58

Wanted to update my outlook for Chinese Renminbi’s ($CNY) major FX crosses, because the Yuan itself has rallied hard over the last week…

Background

A month-and-a-half ago, I called CNY’s currency crosses “the most important charts in the world right now”…

“the most important thing is CNY’s FX cross against other major currencies like $EURCNY and $JPYCNY — a real-time barometer as to how protracted the impact a strong/strengthening Yuan is having on the global economy… It’s critical for China that the Yuan not strengthen any further from these levels.”

Toward the end of October, both currency pairs looked poised to breakout, having coiled their ways into a descending triangle (EURCNY) and a symmetrical wedge (JPYCNY), respectively.  Yet, with the narrative now expecting both a Fed rate hike in December, DXY has rallied back up near highs, dangerously strengthening CNY against all comers due to its USD peg (i.e. a breakdown in both its EUR and JPY crosses).

EURCNY

  • Currently in -5% drawdown from the midpoint of its Q3 trading range
  • Daily LT bear flag w flagpole support @ 6.55 (-2.8% from current)

EURCNY daily 2015.11.09

JPYCNY

  • Currently in -3% drawdown “
  • Daily LT H&S bottom w R shoulder support @ 5.05 (-2.25% from current)

JPYCNY daily 2015.11.09

Conclusion

This is a bearish development for global risk, but my base case expectation (i.e. intervention to weaken CNY) remains the same

“If CNY holds steady, the Chinese economy won’t likely experience resurgent sentiment until yoy comps lap the FX headwinds (~2/2016).  If China can intervene with monetary or (preferably) fiscal measures before YE2015, they should be able to accelerate the healing process.

“With the BoJ and ECB continuing their material quantitative easing programs — as juxtaposed by a tightening Fed — China will likely require some policy intervention to stimulate the economy in the interim.”

–Romeo

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