China provides room for the yuan to strengthen

30 November 2022 89
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The latest coronavirus outbreak in China has rattled investors. The main risk was that the country's leadership would decide to tighten movement restrictions, which would certainly have a negative impact on the Chinese economy.

 

However, the latest data provided by analysts does not indicate a tightening of restrictions.

 

According to Rystad senior vice president Claudio Galimberti, the current real-time data indicates only a small downturn in traffic in China. National traffic in the fourth week of November is at 95% of 2019 levels, compared with 97% at the beginning of the month. It is an indication that the economic activity of the population has practically not plummeted.

 

China not loosening its Zero-COVID policy remains a possibility. Moreover, based on the current situation, we get a feeling that China can accelerate the opening of the economy. Such an event will certainly have a positive impact on commodities as well as on the strengthening of the Chinese yuan.

 

A head and shoulders reversal pattern is forming on the USD/CNY chart. For its final formation, it is necessary to break down the neckline of 7.02 yuan per dollar. Thus, the first target of the descent is the level of the neckline.

 

In the case of a successful penetration of the neckline and pattern realization, we get the second target of the descent of 6.7 yuan per dollar.

 

The first target of the yuan strengthening can be achieved on a short-term time horizon. The second target of strengthening relates to the medium-term horizon.

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