USD/CNH in Focus Amid China Concerns
2022.11.23 08:30
- CNH falling due to COVID outbreak
- FOMC minutes in focus
- USD/CNH tests key level
The will be in sharp focus later when the FOMC’s last are published, which means the will become even more important given the risks it faces from the latest wave of COVID in China.
The last FOMC meeting was held before the much weaker than expected October inflation report was published. That report led to a big sell-off in the US dollar and caused stocks, bonds, and to rise sharply. Some Fed officials have already revised their views on inflation and the pace of hikes. So, the market impact of the FOMC minutes might be more subdued than usual.
However, that said, the market will need some clarity after about the terminal interest rates. Additionally, will the Fed signal it will slow down the pace of tightening imminently?
Although the case for peak inflation has grown, the fact that interest rate increases are not yet pausing in the US means the dollar will likely remain supported on the dips.
The USD/CNH faces additional upside risks stemming from weakness in China’s economy, the world’s second largest. There are concerns that China may tighten its COVID curbs further because of the current wave of COVID. Cases have risen to levels last seen in April when Shanghai was put in a stringent lockdown.
Although China relaxed some restrictions, its zero-COVID policy means the threat of more growth-choking lockdowns is there. This is going to hold back the yuan and potentially risk assets across the board.
Now, the USD/CNH has more than made up the losses we saw Friday and again on Tuesday when the sellers stepped in to defend resistance at around 7.1700 – 1.1800 area. If the USD/CNH now breaks above here on a daily closing basis, then this could pave the way for a run toward the next resistance around 7.2293, the base of the recent breakdown.
Meanwhile, if resistance holds, then the next support is seen around 7.1100, followed by 7.1000. If we get there and that level breaks down, then the long-term bull trend line will come into focus again.
Disclaimer: The author does not hold any of the assets mentioned in this article.
