USD/CNY: Bearish flag signals the yuan strength is far from over

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Dec 15, 2020
  • The USD/CNY pair has formed a bearish flag pattern in the past few days.
  • This signals that the pair will break-out lower in the near term.
  • It is reacting to positive industrial production and retail sales numbers from China.

The USD/CNY is up for the sixth straight day as traders react to the latest data dump from China and the release of the digital yuan. It is trading at 6.5537, which is slightly higher than the year’s low of 6.5198.

USD/CNY
USD/CNY chart

China releases strong numbers

The Chinese economy has been firing on all cylinders recently. After experiencing a sharp contraction in the first quarter, it bounced back by 3.2% in the second quarter and 5.3% in the third quarter. This growth was mostly because of high international demand and the fact that China handled the virus well.

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This strong performance continued in the fourth quarter, according to the latest numbers by the country’s bureau of statistics. Fixed asset investments increased by 2.6% in November after increasing by 1.8% in the previous month. This is an important figure because it shows that companies and businesses are optimistic about the economy.

Further data showed that the country’s industrial production increased by 7.0% in November pushing the year-to-date increase to 2.3%. At the same time, the country’s retail sales increased by 5.0% in November, a better performance than the previous month’s increase of 4.3%.

These numbers provide a further signal that the Chinese economy will do excellently in the fourth quarter. This is as analysts expect other major economies like the United States, Canada, and those in Europe to struggle because of the rising Covid cases.

The USD/CNY is also rising as forex traders react to the ongoing testing of the digital yuan. The currency’s aim is to make local and international transfers safe and more effective. More than 20,000 merchants in JD.com were paid using the digital yuan during its initial test.

Meanwhile, the pair is also reacting to the likelihood of a stimulus deal in the United States. This is after more senators unveiled two stimulus bills. One will be a $748 billion package that will boost education, vaccine distribution, and businesses. The other one is a $160 billion bill that includes funds for state and local governments.

USD/CNY technical outlook

USD/CNY
USD/CNY technical chart

The USD/CNY pair has been in a steep downward trend in the past few months. It has dropped by more than 8% from its highest point in May. This decline has been supported by the 25-day and 15-day exponential moving averages. In the past few days, however, the pair has formed a bearish flag pattern that is shown in black. Therefore, after this consolidation, the pair will possibly break-out lower.

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