Easy as Yuan, Two, Three

August 5, 2019

All the talk on Monday was over the development of the Chinese Yuan falling drastically against the US Dollar. For some, this is a huge deal because they get to tie it to some political headline about Trump, tariffs, trade tensions, etc. But for technicians it's a big deal because the 7.00 level in the $USDCNY ratio is a really important one. We saw this area tested in late 2016 and late 2018, but both times there was no advancement higher. As of today, we now have the breakout. So, what are some of the best and brightest technicians saying about it?

**Since it was such a brutal day in the equity markets, before we get started, I'd like to cheer everyone up and offer a little humor (via Andrew Thrasher):

Looking forward to FinTwit becoming yuan experts today.
— Andrew Thrasher, CMT (@AndrewThrasher) August 5, 2019

Going into the weekend, Nautilus Research had pointed to an interesting development on the chart, implying a move higher could be right around the corner. This would complete an inverse head and shoulders pattern in the process:

$USDCNY -- Chinese currency to weaken further? pic.twitter.com/8rnrjv1CTl
— Nautilus Research (@NautilusCap) August 2, 2019

Matt Weller with FOREX.com says that this 7.00 level is extremely important, in his opinion:

Two weeks ago, I called $USDCNY 7.00 "the most important price in the world" - that level has now broken, suggesting that the US-China trade tensions may be prolonged and could get worse before they get better. pic.twitter.com/NMsbjSxt6c
— Matt Weller CFA, CMT (@MWellerFX) August 5, 2019

Newton Advisors' Mark Newton also notes the 7.00 level and adds that we haven't seen this in over ten years:

Offshore Chinese Yuan $USDCNH Very bullish breakout from a Cup & Handle pattern w/ China's currency falling below the important RMB 7.00 per USD level a record low for 1st time in more than a Decade. Technically,this pattern suggests additional Yuan Decline v USD ( Higher USDCNH) pic.twitter.com/aMvJXefIwA
— Mark Newton CMT (@MarkNewtonCMT) August 5, 2019

The Godfather himself, Ralph Acampora, points out that the weakness in the Yuan is also spilling over to equity indices:

The global reaction to the falling yuan and the increased tariff tensions between China and the U.S.A. is dramatically breaking most of the uptrends in the leading market indexes that have been in place since the early June lows.
— Ralph Acampora CMT (@Ralph_Acampora) August 5, 2019

Fellow TCR contributor Steven Strazza brings to our attention that this most recent short-term move in the currency is the most dramatic since 2015:

Short-term momentum in the Yuan at its lowest level since the PBOC shocked markets with 3 straight devaluations ahead of the 2015 Flash Crash

When things are bad in China, they aren't too good in the rest of the world

And you know things are bad in China when they devalue $CNY pic.twitter.com/xWlpW3Wc6f
— Steven Strazza (@sstrazza) August 5, 2019

The account MacroCharts noted how tight volatility had been recently in $USDCNH. They also believe another trend similar to 2015-2016 could be on the horizon:

USDCNH risk reversals soaring.

FX Vol was super compressed the last 2 weeks and this is the result.

Another 1-2 days and this could get extreme.

If Yuan is in a new devaluation cycle, look for USD uptrend similar to 2015-16, stair-stepping breakouts/pullbacks.$USDCNH $USDCNY pic.twitter.com/Qzuzdxg2CL
— Macro Charts (@MacroCharts) August 5, 2019

Lots of opinions from many smart, talented technicians out there. We are getting great insight from both a data and a price perspective. Structurally, this is a classic breakout above resistance around 6.98 for the US Dollar/Chinese Yuan ratio. Whatever may be the cause, that is for the media and journalists to banter over. As far as technicians go, we should see this as a bullish signal and most likely a continuation of the uptrend. Feel free to contact us with any questions.

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Andrew Thrasher,

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Easy as Yuan, Two, Three

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