USDCNH: On Its Way Up?

The recent huge sell-off in the Yen against the USD warns of a sell-off in the CNH our view of the fundamentals, sentiment, and technicals are below.

USD/JPY has surged higher by around 6% in a matter of days so why does this warn of a move up in USD/CNH?

The fall in the JPY against the USD makes Japanese exports more competitive against Chinese exports and the Chinese will not want this to happen so will let the Yuan fall.  

At present we have a global economy that is slowing and exports like China and Japan face contracting exports.

Global Recession Coming?

“Global recession is coming. China (black), Germany (blue) & Japan (pink) are the world’s biggest exporters. New export orders in their manufacturing PMIs are tumbling, signaling weak global demand.” (BofA)

China is seeing an easing after the COVID lockdowns hit major hubs such as Shanghai but growth was slowing before lockdowns and the global economy is contracting which means there will be no big recovery in China.

“In China, we retain our below-consensus 4.5% growth forecast for 2022. China’s top policymakers set a 5.5% GDP growth target for the year at the recently-completed National People’s Congress meeting, on the high side of the expected range. The growth target still looks ambitious in light of the many headwinds to growth” (Tilton, GS Asia)

China tends to inflate its economic numbers so they will be worse than the above target.

China PMIs a leading indicator in terms of GDP has turned down and will fall further in the coming months.

Other Bullish USD Fundamentals

China will look to let the Yuan fall to try and gain export share. Also, we think the USD could rise on the back of the Fed hiking rates and also the potential for risk-off in financial markets.

Technicals

On the weekly chart below we can see a big surge higher in the USD and then a correction – if we hold support and break out above resistance we expect a move back to recent highs.