USD/CNH reached a low on 20th Jan 2020, boosted by signing of a phase 1 deal between the U.S and China. However, from 20th January 2020, worries over the coronavirus have sent the Chinese Yuan reeling to a low of 7.0226. Price is currently pulling back and the 20EMA has managed to halt the decline but we think this is only the first part of the correction and price is likely to travel lower again to 6.9420 or 6.9290 to end the corrective decline. Stochastic is declining from the overbought extreme and a decline in the Stochastic could lead price lower to our target zone. MACD is still bullish and both its lines are above the zero line, hinting of a bullish trend.
The Wuhan coronavirus was first reported on the 31 Dec 2019 but official data only came out on 17th Jan 2020 with the death toll not reported until Feb 1. As the coronavirus spreads and intensifies, CNH started to weaken to 7.0226. As the coronavirus spread, the Chinese government started to implement lockdown during the Chinese New Year period. This has resulted in lesser travel arrangement and has also resulted in much business lost during the busiest period of the year. As the virus spread and worsen, the Chinese government extended the holiday period, resulting in factory shutdown lasting longer. This shutdown is likely to affect the Chinese GDP. Goldman Sachs has already downgraded its forecast for the Chinese GDP from 5.8% to 5.2%, reflecting the concerns of the Chinese factories shutdowns and the possibility of a global supply shock.
The death toll and increase in the number of cases has not slowed down and if the epidemic continues, it is likely to take a toll on the China’s economy. There is no time line as when the epidemic will end or even if the rapid spread will continue. It could continue for a new more months and this will take a toll on the GDP as well as the currency.
In view of the virus epidemic, we think Yuan will continue to depreciate. Look to buy the dip to 6.9400 with a stop below 6.9180 for profit target at 7.0880.