Slow Burn – USD/CNH

As the USD rises authorities in China are faced with a growing problem. Although they are allowing a gentle depreciation of the CNY against the USD, it is not keeping pace with USD gains. This appreciation by proxy puts pressure on the People’s Bank of China to force further CNY falls.

As the USD rises authorities in China are faced with a growing problem. Although they are allowing a gentle depreciation of the CNY against the USD, it is not keeping pace with USD gains. This showed up in trade data this week, where exports fell off a cliff. This appreciation by proxy puts pressure on the People’s Bank of China to force further CNY falls (USD/CNH rises).

One of the problems of pegging a currency is becoming subject to another central bank’s monetary policy. Since late April, the USD index is up 6.5%. The problem for the PBoC is that over the same period the CNY has only fallen 3.8% against the USD. Naturally, this means CNY is up against the EUR and the JPY.

Even without further USD gains, USD/CNH could rise more. Any further USD strength from here increases the likelihood of USD/CNH gains, as the PBoC tries to maintain levels against other major currencies. (CNH is the Hong Kong settled, external and tradeable CNY). And the chart shows the pair moving through a crucial point.

The move up through 6.7320 looks like a break-out. Traders may consider buying at current levels, with a stop loss around 6.7280. Taking profit is a little more subjective. This is uncharted territory for USD/CNH, which only began trading in 2010.

One approach could involve watching the USD index as it approaches 13 year highs just above 100 (currently around 98). Another is to take profit if USD/CNY re-attains the level of post GFC stability around 6.8200. Those less impressed bu scarce charts may simply use a trailing stop loss order.