The case for a Weaker Yuan

The most recent Caixin Manufacturing PMI dipped below 50, landing back in contraction territory after two prints above the 50-mark. As the world's top exporter, China is acutely sensitive to fluctuations in both exports and manufacturing numbers. Historically, we've seen periods of Yuan devaluation during times of contracting Manufacturing PMI and exports as China works to invigorate export demand. With the latest PMI number trending lower, it's worth pondering whether this signals a movement toward a weaker Yuan.

A more detailed examination of Chinese economic data presents some reasons for concern. Chinese export-related economic data has collectively taken a downward turn. This could stimulate further Yuan weakening as the government strives to reinvigorate exports.

Moreover, as the world's second-largest oil importer, lower oil prices gives China additional leeway in weakening its currency, as the ripple effects of higher oil prices are tempered.

From a technical perspective, the CNH is teetering on the edge of the 200-day moving average, and prices have once more nudged above the 0.382 Fibonacci retracement level.

Meanwhile, in a shorter timeframe, we notice price action breaking out of the ascending triangle and nearing the top of the wedge pattern.

With the USD breaking to the upside coupled with the potential for a weakening Yuan, we think this makes the case for a higher USDCNH. Taking a risk-managed long at the current level of 6.9520, a prudent stop 6.8930 and take profit level at 7.0900. A Standard Size USD/Offshore RMB (CNH) Futures represents 100,000 USD. Prices are quoted in RMB per USD, each 0.0001 per USD increment equal to 10 CNH.

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Reference:
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