Is CNYJPY Set For A Consolidation?

• This year, we have seen that the elevated Covid uncertainty has led to a sharp divergence in growth expectations between the US and the rest of the World (especially EM), which has strongly supported to the US Dollar.
• The USD index is up 6.7% year-to-date, and momentum could continue against vulnerable EM currencies as Fed accelerates its tapering.
• However, one currency that has been performing well in the current ‘strong USD’ environment is the Chinese yuan, which is up over 12% against the greenback since May 2020 (pandemic low).
• We have seen recently that China officials have started to adopt a looser policy in attempt to stimulate the economic activity, rebuild confident in risky assets and potentially weaken the ‘expensive’ CNY.
• CNY strength tightens financial conditions and generally tends to result in a downward revision in growth expectations.
• The Chinese yuan has also been appreciating sharply against ‘risk-off’ JPY in the past 18 months; CNYJPY is up over 22% since its March 2020 low.
• A constant strengthening currency could start to cut into overseas trade, with Japan (and other Asia/SEA countries such as South Korea, Vietnam) being one of the top export countries for China.
• CNYJPY rejected its 18.10 resistance last month, which corresponds to the 61.8% Fibo retracement of the 14.57 – 20.29 range.
• The pair is currently testing its 50DMA at 17.81; a break below that level would open the door for a move down to 17.66.

Source: Bloomberg/MNI