Strategy
Buy 6.3750 for 6.5875 with a stop below 6.3035.
Technical View
On the weekly chart, the price decline is seen to be slowing down. Price had declined from the high at 7.1961 in May 2020 to the low at 6.3035 in 20 February 2022. The candlestick size in recent days is also getting smaller. Both Stochastic and MACD are hinting with divergence of a possible price low. These are signs of a potential bottom in the process of forming. Price has also moved above the 20EMA. This could be a confirmation of the low.
If price has formed a low at 6.3057, we are likely to see a price movement to the previous price resistance at 6.5875 in the next few months ahead.
Fundamental View
Since the beginning of March 2022, COVID-19 cases have been on a rise, reaching 4,569 cases on 22 March 2022. China has implemented lockdown as the government has a zero case policy. This zero policy has a cost on the economy. Production will be lower. Annual GDP and economic growth will be lower for the year. Markets now widely expect policymakers to resume monetary easing soon to revive an economy hit by a domestic COVID-19 resurgence. The Chinese economy is also weighed down by weaker credit growth and a faltering property sector as well. This is likely to lead to a weaker China yuan against the US dollar.
To help the economy, the Chinese central bank is likely to lower its interest rate. Reserve ratio requirement was lowed for the third time in January 2022 and is expected to be lowered another time in the 2nd quarter of 2022. Many analysts are forecasting a 50 basis point cut. This is likely to lead to a narrowing of interest rate differential between the U.S. and the Chinese currency, reducing the advantage of the yuan. With the U.S. Fed expected to hike rates, a widening monetary policy divergence between the world’s two largest economies could shrink China’s current yield advantage over the United States, triggering investors to put their money in U.S. dollar.
War in Ukraine is also likely to aid the safe haven U.S. dollar against the Chinese currency. Fundamental reasons are currently in favour of the US dollar and against the yuan.