Bearish outlook seen for USDCNH

THE USDCNH currency pair has seen a rise of about 3.74 per cent since the start of the year. Prices opened the year at 6.90 and dropped to a yearly low at 6.70 in the same month, before rebounding steadily to hit the annual high of 7.38 in June. Since then, the currency pair has retraced and we project a deeper continuation in this correction as suggested by a few technical observations.

Firstly, a prominent sign that indicates a further downside movement in the USDCNH is a head and shoulders pattern that played out throughout June and July 2023. The chart pattern, which is noticeable on the daily timeframe, is a bearish reversal pattern which signifies the waning of bullish momentum after an uptrend and suggests a further decline in prices upon completion. Head and shoulders pattern can be identified after an uptrend with three peaks supported by a common neckline support, with the first and third peaks almost equal in height, resembling the “shoulders”, while the second peak that is the tallest resembling the “head”.

The USDCNH broke down from the pattern on Jul 25 and has currently risen to retest the neckline support-turned-resistance. In the event prices fail to re-penetrate above the neckline, the magnitude of the downside target will be of equal height as the “head”.

On the other hand, another technical setup that further validates the downside bias is the declining Relative Strength Index (RSI) and a bearish divergence. RSI is a momentum indicator that signals overbought conditions when it is above 70, and oversold when below 30. The 50 level on RSI is regarded as the neutrality zone, where prices are bullish when the reading is above 50, vice versa. At the time of analysis, the RSI is capped below 50, showing a persistent bearish momentum. Moreover, a bearish divergence on the RSI further cements the medium-term downside outlook. A bearish divergence is identified when prices make higher highs while the RSI reading makes lower highs, signalling a waning bullish momentum. Moreover, the narrowing gap between the 20 and the 50 exponential moving averages (EMA) also alludes to an incoming downtrend.

Looking ahead, we foresee that the USDCNH would be capped by 7.19 (R2) if it rises above the head and shoulder neckline around 7.17 (R1). In terms of short-term downside target, we set our level at 7.125 (S1). If prices pierces below this level, we project that the pair would hit 7.06 (S2) and the head and shoulder technical target at 7.01 (S3) in extension.

The writer is strategist at Phillip Nova