USDCNH Breaks Out from Bull Pennant, Signalling Bullish Continuation

19 Jul 2022

After a persistent downtrend since May 2020 that saw the USDCNH fall from the high of 7.196 to a low of 6.306, the pair staged a bullish reversal in February 2022 and it has since rebounded strongly to float around 6.758. The US Dollar Index (DXY) that gauges the greenback’s strength against a basket of rival currencies remains elevated near two-decades high at 107.5.

Strong USD dominates FX space

The steep rise of USDCNH currency pair may be largely attributed to the US Dollar strength, which saw it strengthening against most major currencies. The main factors providing tailwind for the Dollar is the hawkish monetary policy amid sky-high inflation as well as safe haven flows induced by global recession fears and Russia-Ukraine war.

Optimistic US economic data

Last Friday, a series of upbeat US economic data helped lift recession fears. Retails Sales, which is a popular indicator of consumer spending, grew by 1% in the month of June, higher than market consensus of only 0.8%. Another widely anticipated report to gauge the consumer confidence in economic activity was the Michigan Consumer Sentiment Index. In July, the survey reported a reading of 51.1, which is better than market expectations and previous months reading at 49.9 and 50 respectively.

In a typical scenario, the USD tends to appreciate following such upbeat data. However, what we witnessed was a drop in the USD instead. This may be due to some outflows of USD as fears of a US recession subsided. Looking at the bigger picture, our view is that the USD would enjoy further upside, as a robust US economy may leave more room for the Federal Reserve to hike its rate to tame the inflation.

Sluggish growth in China weighs on the yuan

The National Bureau of Statistics of China released the annual and quarterly Gross Domestic Product (GDP) for Q2 last week and it revealed that Chinese economy contracted by 2.6% quarter on quarter, at a pace faster than expected. Compared to a year ago, the GDP only rose by 0.4%, slower than market consensus of 1% growth.

Overall, China’s unwavering pursuit of Zero Covid policy presents a real risk for China’s domestic and global economic outlook, as a lockdown in China would send shockwaves across the global economy.

Technical Analysis

Technical set up for USDCNH is bullish as it had broken out of a bull pennant formation. Moreover, the Relative Strength Index (RSI) on the weekly chart is supporting the bullish outlook as it hovers just below the overbought level of 70. Another indication for a further uptrend is the crossover of the 20 EMA above the 50 EMA.

Breakout from the bull pennant is a bullish continuation signal and it sets the next price target at R1 (6.838), which is the top of the bull flag. If the rally sustains above R1, the subsequent technical targets are R2 (7.03) and R3 (7.16). In the alternative scenario of a downside move, S1 (6.67) would support the pair.

Tuesday, July 19

USD – Building Permits (MoM)(Jun), Housing Starts (MoM)(Jun)

Wednesday, July 20

CNH – PBoC Interest Rate Decision

Thursday, July 21

USD – Initial Jobless Claims(Jul 15), Initial Jobless Claims 4-week average(Jul 15), Philadelphia Fed Manufacturing Survey(Jul)

Friday, July 22

USD – S&P Global Composite PMI(Jul), S&P Global Manufacturing PMI(Jul), S&P Global Services PMI(Jul)

Trade Forex on Phillip MetaTrader 5 (MT5).

Trade Forex at zero commission on Phillip MetaTrader 5, a dynamic platform that offers low spreads. Integrated with Acuity’s Signal Centre and Trading Central Indicators, and available on mobile and desktop app, you will never miss a trading opportunity with Phillip MT5.

Download Trading Central’s Market Buzz for updates on more topics.

What’s more? Phillip MT5 is now supported on Mac OS! To install, simply download the file below and complete a simple installation process.

Free Phillip MT5 Demo Account

Fast and Secure Online Account Opening

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

More Market Trends

25 Nov 2024

By Priyanka Sachdeva, Senior Market Analyst for Phillip Nova Gold Market Snapshot Gold prices corrected sharply after a quiet weekend in the Russia-Ukraine conflict.

Client Portal