USD/CNH Forecast:Chinese Yuan Testing a Major Level on Tuesday

• The Chinese yuan continues to threaten a break below the 7 handle, something that could kick off a cascade of selling.

USD/CNH

The US dollar finds itself on the back foot against the Chinese yuan again during the trading session here on Tuesday, as we are approaching a pretty critical area. Somewhere around the 7.00 level, you will see a little bit of support, and we are just a touch underneath there as I record this, but I would also point out it is a bit of a zone. In fact, I think the zone probably runs from 7.00 down to somewhere around the area of 6.97.

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So, we are right in a vicinity where you might expect some type of bounce. A lot of this is going to come down to risk appetite, with obviously China being more of a risk-on type of play and the US dollar being a safety currency. We are in an area that I am watching that if we can bounce a bit, perhaps clearing the 7.02 level, we may grind back to the upside, perhaps as high as 7.30.

Risk Management and Market Sentiment

Keep in mind that the interest rate differential can fluctuate quite wildly, and even though the CNH is actually the offshore Chinese yuan, there is a definite influence from the People’s Bank of China. With that being said, we are in an area that, historically speaking, has been supported, but you will have to check with your broker what the swap is. You typically will pay the swap to go long, but the question then becomes: Is it that much? We will have to determine that on a broker-by-broker basis, but this is an area I would be very interested in.

Alternatively, if we were to break down below 6.95, I think you have the US dollar falling to somewhere near 6.70. All things being equal, this is a risk-on or risk-off type of trade with the US dollar being the safety currency. So pay attention to everything else. Pay attention to the strength of the US dollar against other major currencies such as the euro or the pound, because if it does pick up, it almost certainly will pick up here.

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