USDCNH: Upward pressure waning?

Written by Larince Zhang

China’s Caixin services PMI unexpectedly outperformed expectations in May, rebounding to 57.1 from 56.4. The composite PMI followed suit, rising to 55.6 from 53.6. overall, and the services and composite PMIs expanded for the fifth consecutive month, with the former growing at the second-fastest pace since November 2020 and the latter at the fastest pace since December 2020.

Earlier, the Caixin Manufacturing PMI rose from 49.5 to an expansionary level of 50.9, but concerns about overseas uncertainty lingered, with “lack of domestic momentum in economic growth” and “low confidence among market participants” leading to a seven-month low in investor sentiment. Investor sentiment is at a seven-month low. In contrast, the services sector was more positive, including output growth at a faster rate than manufacturing. On the employment front, the services sector climbed for the fourth consecutive month, while the manufacturing declined at its fastest pace since February 2020, offsetting the former.

China Caixin Services and Manufacturing PMI vs Composite PMI. Source: Trading Economics
China Caixin Services and Manufacturing PMI vs Composite PMI. Source: Trading Economics

In the US, Markit and ISM also released their services PMI and non-manufacturing PMI respectively, both of which underperformed, with the former falling from 55.1 to 54.9 (after four consecutive months of expansion) and the latter falling from 51.9 to 50.3 (after five consecutive months of expansion, but the slowest rate of growth in the series.) ISM reported that the declining readings were driven by several factors, including a slowdown in business activity, new orders as well as new export orders, and a contraction in employment. The S&P Global Services PMI for the US was revised down slightly to 54.9 from an initial reading of 55.1. In response, Anthony Nieves, Chairman of the ISM Services Survey Committee, said: “Business Conditions are stable, but concerns about an economic slowdown remain“.

US ISM Services PMI. Source: Trading Economics
US ISM Services PMI. Source: Trading Economics

Fedwatch showed that the market’s probability of the Fed keeping the benchmark interest rate unchanged next week rose to 76.0% from 74.7% a week ago. This is a big difference from 35.8% a week ago.

Technical analysis:

USDCNH, daily chart: The pair maintained a range-bound oscillation in the first half of the year, before breaking above the first quarter high (6.9953) in mid-May to start a new uptrend. Resistance is currently being tested at 7.1150 (FR 61.8% from last October’s all-time high to this January’s low).

USDCNH, 4-hour chart: The smaller time frame shows that the pair is in an upward channel. The MACD indicator shows that the upper (daily) double line is looking to form a dead cross, while the lower (4-hour) chart is forming a negative divergence from the currency pair. In addition, the MACD white histogram is gradually narrowing in both time frames, which may reflect diminishing upside momentum.

On a macro level, if the Fed keeps interest rates unchanged as expected by the market, this could contribute to a further decline in the attractiveness of the Dollar and is expected to increase selling pressure on the pair. The bottom line of the uptrend channel is currently the nearest support, followed by dynamic support at SMA 100.

About the author

Larince Zhang

Larince entered the world of live market analysis and trading in 2013. Her passion ranges from foreign exchange to commodities, indices and futures as well as stocks. Having a Bachelor Degree majoring in Banking and Finance, she strives to make full use of her learned knowledge together with practical trading to achieve a more comprehensive market analysis.

Through years of trading experience, she believes “Simple is Best”, as the market is driven by human activity. It is human psychology that one should opt to improve on instead of mere technical or fundamental analysis. She believes in three core elements to a mature trading approach – scrupulous trading mindset, well-planned strategies and strict money management.