Chinese yuan double top points to possible drop

Last week, we discussed the fundamental and technical outlook for the offshore Chinese yuan (CNH) (CME:QTN14). From a fundamental perspective, we noted that “many market participants anticipate that the People's Bank of China will be forced to cut interest rates or reserve requirement ratios at some point in Q3,” while on the technical side, we concluded that “the USD/CNH could pull back to test near-term support at its 50-day MA (6.2290) or the 23.6% (6.2105) or 38.2% (6.1730) Fibonacci retracements of this year’s rally.”

In retrospect, our timing was a bit off. Instead of waiting for the start of Q3, the PBoC acted over the weekend to cut reserve requirement ratios for small business and rural banks as my colleague Chris Tedder noted earlier today.

However, this partial cut actually makes a full RRR cut less likely in the near-term as the Chinese government sticks to its path of piecemeal steps to ease economic conditions, rather than the bold measures of years past. As a result, the USD/CNH actually fell on the announcement, painting a very bearish short-term technical picture.

Assuming today’s move below 6.2180 is maintained, the pair will complete a classic double top pattern over the last five weeks. After the quadruple bearish divergence with its RSI indicator, this pattern strengthens the likelihood of a meaningful top in the pair and may finally put an end to the persistent yuan weakness that has characterized 2014 thus far. The downward trend in the MACD indicator further bolsters the bearish case.

From here, a move down toward the 38.2% Fibonacci retracement at 6.1730 is favored; this level also represents the measured move target of the double top pattern. A break below there could pave the way for a possible move back to the 200-day MA around 6.1250 later this summer. On the other hand, a recover back above the 50-day MA at 6.2330 would shift the near-term bias back to neutral.
 



Source: FOREX.com

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).

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