Fundamental Forecast for the Yuan: Neutral
The USD/CNH broke above a key level of resistance at 6.8845 on Friday, driven by the Dollar advance following an increased odds in Fed rate hike. The offshore pair also climbed above the PBOC’s guided level and the onshore Dollar/Yuan pair, indicating a weaker Yuan in the offshore market. Looking forward, the Dollar strength, a heavy Chinese calendar and the on-going top Chinese conferences may add mixed moves to Dollar/Yuan rates.
The USD/CNH was right below 6.9088, the 61.8% retracement of the January drop, as of 3 pm EST on Friday. This is the next key resistance level to watch for the offshore pair. A sustained break above this level may bring up the possibility of the long-term bullish trend in the offshore pair, which will be bearish for the Yuan. The U.S. Fed Chair Yellen said Friday afternoon that “March hike is appropriate if economy evolves as expected”. This makes all eyes on the February Non-farm Payrolls print to be released on March 10th. If the read falls in line with Fed’s expectations, it may further boost the likelihood of a March rate hike. In turn, this would drive the Dollar/Yuan higher. Also, one of the voting members of FOMC, Neel Kashkari, will give a speech at 3pm EST next Monday. It could add some volatility to the FX market as well.
On China’s side, the National People’s Congress (NPC) will release the economic outlook and targets on Saturday night EST, which may drive Yuan moves. Also, a heavy calendar of Chinese data is likely to further elevate the Yuan’s volatility. Both exports and imports are expected to continue to improve in February according to consensus forecasts from Bloomberg. If that is the case, it will be good news for China amid an economic slowdown.
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