USD/CNH: outlook and forecast
The Chinese economy is slowing internally and exports are being hit by a stronger Yuan and surging freight costs. We expect the Peoples Bank of China to take action and bring the Yuan down and see USD/CNH as an attractive risk to reward long trade…
Delta remains a bigger problem in Asia than in the West as nations adopt a “zero tolerance” policy. The impact of this is to create bottlenecks in the Chinese supply chain which has sent freight charges surging higher.
Higher freight charges and a stronger Yuan are impacting on Chinese export competitiveness and we expect the Chinese to act and sent the Yuan lower to help exporters profit margins. In terms of rising freight charges, there is not much the Chinese can do about the problem.
The start of the huge move in freight rates coincided exactly with the date when the Chinese Dalian port was closed due to a COVID outbreak, which has since been accelerated by closures of ports/terminals in Dalian and most recently Ningbo-Zhoushan which is the third busiest port worldwide. These disruptions will continue as authorities clamp down on Covid outbreaks.
The Chinese economy is slowing up and Chinese growth has peaked. The rise in the Yaun is hurting Chinese exports the Peoples Bank of China are mindful of the impact of a strong Yuan and will move to weaken it in our view.
In the past, the Peoples Bank of China has used reserve requirement ratio cuts (RRR) but it may be even more effective to deliver a surprise cut to one of the policy rates with a direct impact to the real economy such as the one-year loan prime rate.
The RRR cut will help the supply side and a cut to one of the lending rates can be used to stimulate the demand side. A weaker Yuan looks likely and the risk-reward of buying the USD is attractive in our view.
Technical Analysis
The technicals show tight sideways action and on the weekly chart we view a breakout above 6.500 as a buy with a stop below the bottom of the channel. If we do breakout to the upside we expect a major rally to 6.700 then 6.900.
Research provided by LearnCurrencyTradingOnline.com
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