With troubling economic data out of China leading to rate cuts, along with an expected hawkish speech from Fed Chairman Powell on Friday at the Jackson Hole Symposium, USD/CNH could be volatile this week.
The US Dollar surged last week on the back of hawkish comments from Fed officials, prompting markets to increase expectations of a 75bps rate hike when the Fed meets for its interest rate decision on September 21st. With a lack of catalysts, there may be profit taking at some point this week before the Core PCE print and Fed Chairman Powell’s Jackson Hole Symposium speech. Last week, no less than four Fed officials were on the wires discussing such topics as “how it is premature to worry about the economy falling into a recession” and “how the Fed will need to be completely convinced that inflation is coming down before stopping interest rate hikes”. These don’t sound like comments that would lead one to believe that the Fed will be slowing that pace of interest rate increases any time soon! Are Fed officials setting Powell up for a hawkish speech on Friday? Just a few hours before the Powell’s speech, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for an increase to 4.7% YoY vs an expectation of 4.8% YoY. Note that the recent July CPI print was 8.5% YoY, still very high but well below the previous month’s 9.1% YoY print and below expectations of 8.7% YoY. Will the Core PCE (which excludes food and energy) confirm or contradict the CPI reading?
Last week, China reported some dismal economic data. Industrial Production for July decreased to 3.8% YoY vs expectations of 4.6% YoY and a June reading of 3.9% YoY. In addition, Retail Sales for July decreased to 2.7% YoY vs an expectation of 5% YoY and a June reading of 3.9% YoY! Also, the PBOC surprised markets by cutting the Medium-Term Lending Facility Rate by 10bps. After continued Covid issues, increasing drought conditions and worries of a collapsing housing market, the PBOC today decreased its 1-year Loan Prime Rate by 5bps to 3.65% and cut its 5-year Loan Prime Rate by 15bps to bring it to 4.30%. This shows that the PBOC is clearly concerned about the China housing market, as mortgage rates are based of the 5-year rate. The central bank then went on today said that it plans to spend $29 billion in special loans to troubled developers. However, the central bank will still have more to go if it plans on saving the dire housing market!
On a weekly timeframe, USD/CNH formed a double top near 7.1965 in May 2020 and broke below the neckline in late August 2020. The pair fell in an orderly channel to 6.4126 during the week of February 8th, 2021 and began trading sideways/slightly lower in a descending wedge formation for the next 1 year, making a low of 6.3087. However, in April 2022, USD/CNH broke aggressively above the wedge and stalled just below the 61.8% Fibonacci retracement level from the double top highs to the low in February near 6.8569. The pair consolidated in a pennant formation until last week, when USD/CNH broke above the pennant formation. Today, the week is starting off right for traders who are long as USD/CNH traded above the previously mentioned .618 Fibonacci retracement and is on its way to the target, which is near the May 2022 highs at 7.1964.
Source: Tradingview. Stone X
The target for the breakout of a pennant formation is the height of the pole added to the breakout point of the pennant, which as mentioned, is near 7.1964. However, if USD/CNH is to reach the target it must first break through horizontal resistance from March 2020 at 6.9045, then again at the lows of April 2020 at 7.0365. First support is at the May 13th highs at 6.8382, then the top trendline of the pennant near 6.7722. However, if price breaks below there, the next support level is at the bottom trendline of the pennant near 6.7162.
Source: Tradingview. Stone X
With troubling economic data out of China leading to rate cuts, along with an expected hawkish speech from Fed Chairman Powell on Friday at the Jackson Hole Symposium, USD/CNH could be volatile this week. Throw in a weak housing market in China, along with the Core PCE out of the US on Friday, the pair could be on its way to testing the double top highs near 7.1987!
