CNH Tends To Consolidate After Sharp Sell-Off Days

As we highlighted earlier, USD/CNH moves of greater than 1% in a single session (using reported Bloomberg closing levels) are fairly rare events. Indeed, going back to 2015 there have only been 6 trading days, including yesterday's outcome, where USD/CNH has risen by 1% or more in a single session.

• The chart below plots the performance of USD/CNH in the 1 month (21 trading days) after we have seen these daily moves of 1% or larger.
• We have the devaluation episode in 2015, the US-China tariff hike episode in 2018, the break above 7.00 in 2019, the Covid pandemic in early 2020 and then in April of this year as the USD surged and China was in the midst of another Covid wave.
• The dark blue line is the average of these 5 episodes. Interestingly, outside of the 2015 deval period, USD/CNH was slightly lower in the 4-5 sessions post a +1% daily gain. Even including the 2015 episode we are still lower over this period on average.
• These moves are modest, with average losses in the range of -0.40-0.50% for USD/CNH over this 4-5 day period. This is likely to reflect potential profit taking flows on long USD/CNH positions post a dramatic surge higher.
• The China authorities could also work against aggressive follow up moves in the currency, to work against shifting onshore expectations and curb domestic capital outflow pressures.
• Beyond this 5 day period though, higher USD/CNH levels typically follow. On average the pair is still nearly 1% higher in these episodes, with only the 2020 Covid period an outlier.
• If history repeats, we might see USD/CNH enter a consolidative range in the near term, but dips could still be supported by the market. This would fit with the broader macro backdrop around US-China monetary policy divergences.

Fig 1: USD/CNH Performance Post Days Of +1% Gains

Source: MNI/Market News/Bloomberg