-Yuan: Will It Bounce?

AUD/CNH rate remains in a clear downtrend since topping out at CNH5.0692 on Aug 31. The most recent spell of weakness began after the pair rejected channel top on Oct 12-13 while charting a bearish Harami candlestick pattern. Subsequent sell-off was paralleled by the 50-DMA's break under the 100-DMA, reaffirming the underlying bearish momentum. AUD/CNH slid through its 200-DMA and failed to return above that moving average upon yesterday's re-test, even as it charted a bullish engulfing patter, signalling that earlier bearish pressure might be easing.

• The rate trades -64 pips at CNH4.7220 at typing, despite a softer than expected PBoC fix, but broader technical conditions suggest that it may try to recoil. The failure to slide further onto the channel floor (CNH4.6664) coupled with the aforementioned bullish candlestick pattern signals potential for an impending recovery attempt. This expectation is reinforced by a bullish divergence in RSI, which has popped back above the 30 level.
• The 200-DMA at CNH4.7395 provides the crucial near-term layer of resistance. A clean break here would turn topside focus to channel top at CNH4.8211 and Oct 12 high of CNH4.8708. Continued rally past those levels would signal that bulls are regaining control. Conversely, a successful attack at the channel floor at CNH4.6664 would suggest that the aforementioned hints amounted to a false alarm, opening up May 22 low of CNH4.6571 & the 38.2% Fibo retracement of the YtD range at CNH4.6283.
• The key question now is how much yuan appreciation is the PBoC willing to tolerate. Daily announcements of central USD/CNY (& AUD/CNY) mid-point will receive increased scrutiny, following two slightly softer than expected fixings over the last two days.
• Meanwhile, Sino-Australian relations remain under the microscope, as political tensions have spilled over into trade matters, with the latest reports noting that China has implemented curbs on the imports of some Australian commodities, including coal.
• Looking ahead, the RBA monetary policy meeting, due in the first days of November, is also much awaited and easing-bet dynamics moved AUD earlier this month, amid growing expectations that Australian policymakers could take action when they convene in November.