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USDCNH and GBPCNH at risk as Chinese PMI data signals Chinese resurgence


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A raft of strong Chinese PMI surveys signal a strong economic recovery taking shape. Will this bring a resurgence for the Chinese Yuan?

bg_china_flag_hong_kong_gettyimages_1319Source: Bloomberg
 
 Joshua Mahony | Senior Market Analyst, London | Publication date: Wednesday 01 March 2023 

Chinese PMI data signals strong rebound

The Yuan has been on a tear this morning, following a trio of impressive PMI readings out of China. Understandably markets have been curious over exactly how the Chinese recovery was going to take shape following an extended period of zero-Covid restrictions that stifled growth. Up until now, we have seen precious little sign of a major economic boom in the country, with rising interest rates putting pressure on economic growth and demand around the world. However, today has seen that shift, with Chinese factory activity reaching a decade high as services jumped to a lofty 56.3. Notably, the SME-focused Caixin manufacturing PMI figure managed to rise into expansion after six-months of contraction. For markets this is good news, helping to lift growth and demand expectations in a difficult year.

ChinapMI1323.pngSource: TradingEconomics

Understandably, the mix of a wider risk-on move coupled with expectations of Chinese strength brought downside for USDCNH. Coming off the back of a rally into the 7.0127 resistance level, we have seen price reverse sharply lower once again. This has also seen the stochastic finally break through trendline support, reversing out of the overbought territory. Could this be the beginning of a fresh bearish phase for the pair?

USDCNH-Daily-2023_03_01-13h05.pngSource: ProRealTime

The four-hour chart highlights how this recent uptrend does still remain in play for now. While we have seen price collapse through all Fibonacci support levels, we remain above the key swing low of 6.8545. A break below that point would provide us with greater confidence that we could be set for a protracted period of Yuan strength.

USDCNH-4-hours-2023_03_01-13h08.pngSource: ProRealTime

However, it is worthwhile noting that we remain at risk of a major turn in risk attitudes given the gains seen for stocks of late. With that in mind, any significant selloff in equities would bring about a dollar resurgence. In such a case, it may make sense to look at the likes of GBP/CNH for a shorting opportunity if we do see support taken out. The daily chart highlights how price is falling back down from the 8.4234 resistance level. A break below the 8.2093 swing low level would bring about a fresh sell signal, with 8.1317 particularly giving way to a wider continuation of the bearish trajectory seen in December 2022. The breakdown in the stochastic has seen price break through the 80 threshold. From a historical perspective, this has typically preceded a significant period of downside for the pair.

GBPCNH-Daily-2023_03_01-13h21.pngSource: ProRealTime
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