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Technical Analysis USDCNH : 2016-03-02

Bank of China moves do not spur economic growth so far

Bank of China lowered on Monday its reserve requirements to the commercial banks for the 5th time in the recent 12 months. It also cut the credit rate six times since November 2014. It fell from 6% to 4.35% in sum. Such a policy aims at monetary stimulus of the economy. Will the yuan continue weakening?

The People’s Bank of China cut the reserves requirement from 17.5% to 17%. Such a step shall raise the long-term money liquidity by $100 bn. Moreover, the Bank of China raised the money supply by 14% last year and cut the forex reserves proportionally. In monetary terms they contracted by $512.7 bn. All this happened amid the lowest in the recent 25 years GDP growth of 6.9% in 2015. The lower industrial PMI for February came out on Tuesday in China, the index is falling for the 7th time in a row. So, despite all the steps by China’s Central Bank, the high pace of economic growth does not seem to recover. Given all mentioned above, many market participants expect the Chinese currency to devaluate to 7 yuan per US dollar till the end of this year. Next week much significant economic data will be released in China. In particular, the important external trade balance for February will come out on Tuesday and inflation and lending indicators are due on Thursday.

 

USDCNH

On the daily chart USDCNH: D1 has corrected, reached the 50% Fibonacci retracement and rebounded from it upwards. It has surpassed the resistance of the downtrend. The Parabolic and MACD have formed the signals to buy. RSI is edging up and is close to 50, no divergence. The Bollinger bands have widened a bit which means moderate volatility. The bullish momentum may develop in case yuan surpasses the level of 6.56. This level may serve the point of entry. The initial risk-limit may be placed below the Parabolic signal and the second fractal low at 6.48. Having opened the pending order we shall move the stop to the next fractal low following the Parabolic and Bollinger signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 6.48 without reaching the order at 6.56, we recommend cancelling the position: the market sustains internal changes which were not taken into account.

 

Position Buy
Buy stop above 6.56
Stop loss below 6.48


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