Yuan Strengthens

USD/CNH continues its crusade lower to start 2021. The pair last down around 363 pips at 6.4672.

China's Caixin Manufacturing PMI, which focuses on SME's, fell to 53.0 in December from November's multi-year high of 54.9, missing the expected reading of 54.7. Output falls to 55.4 vs 57.1 in Nov. New orders fall vs prior month to hit the lowest reading since Aug. 2020. While the metrics are still in expansionary territory, growth is showing signs of flattening towards the end of 2020. The yuan ignored the slightly weaker data.

• The EU China reached an agreement to open the Chinese market further to EU investors which could provide a tailwind to the yuan.
• The PBOC strengthened the yuan some 159 pips today, and withdrew around CNY 140bn yuan from the system. Both of these measures failed to stem the flow of yuan strength. USD/CNY has dropped, last down around 337 pips at 6.4930, taking the onshore yuan through the psychological 6.50 level.
• On a historical basis 6.44 is significant resistance in USD/CNH and could represent a line in the sand for the PBOC. Bears need a sustained break of 2016 and 2017 lows and 78.6% Fibonacci retracement, which were made at 6.4437 and 6.4417, respectively. Below are the May 2018 high at 6.4323 and also the February and early May 2018 highs at 6.3835 and 6.3774. A downward sloping trend channel at 6.4528 provides further support, before eyeing the June 2018 low near 6.3760.
• There is scope for the pair move higher, oversold RSI conditions suggest corrective pullback towards regaining the 6.50 figure, though, a confluence of 21-day SMA and channel's upper line near 6.5200 will be a tough nut to crack for USD/CNH bulls.