The recent weakness in the Chinese yuan against the US dollar appears to be fading, with the currency now drifting inside a tight band. According to UOB analyst Quek Ser Leang, USD/CNH first slipped to 6.7865 before steadying. During the session the pair swung between 6.7911 and 6.8025, eventually closing at 6.7948, barely changed from where it started. The near-term expectation is that the dollar stays boxed inside this narrow range.
The bigger takeaway is that the dollar strength that had been driving the pair higher looks to have run its course. That is why any sharp further rise in the greenback against the yuan is seen as unlikely for now.
The 24-hour outlook
Two days ago the dollar dropped to 6.7865 and then rebounded. When it was trading near 6.7920, the read was that the rebound from oversold conditions meant the dollar was unlikely to weaken much further, and the pair was expected to hold between 6.7860 and 6.7990. That is roughly how it played out, with the dollar moving inside a 6.7911 to 6.8025 range before closing at 6.7948, a modest gain of 0.05%. Because that price action offered no fresh clues, the pair is again expected to trade between 6.7860 and 6.7990 in the coming session.
The one to three week view
Over the medium term the message is clear. On 1 July, with spot at 6.7920, the call was that the dollar's recent strength had come to an end, and that the pair was likely to trade in a range between 6.7750 and 6.8080. That view still stands. A real, durable recovery, however, would require the dollar to break decisively above the 21-week EMA at 6.8430. Until that happens, the action is expected to stay hemmed in.
Why the dollar is under pressure
The dollar's softness is not limited to the yuan; it is showing up across the major currencies too. June's US Non-Farm Payrolls (NFP) print came in softer than expected, triggering renewed selling in the greenback. As a result, GBP/USD traded well above 1.3300 on Thursday and now looks set to challenge 1.3400 before long. Similarly, EUR/USD left behind two straight daily pullbacks and climbed to multi-day highs near 1.1470, partly offsetting the sharp decline that had been in place since June, helped along by a heavy sell-off in USD/JPY. US markets will be closed on Friday for the Independence Day holiday.
Gold was another beneficiary of the retreating dollar. On Thursday the metal extended its rally, pushing above $4,100 per troy ounce to reach its highest level in a week, as the softer NFP data pulled the dollar lower.
Attention now turns to the Federal Reserve's next move. Investors gathered in Sintra hoping for clues about the path ahead, but largely came away with confirmation that Fed Chair Kevin Warsh intends to make those clues much harder to read.
The live market picture
Live market data puts USD/CNY around 6.79, essentially flat on the previous close at up 0.01%. Over the past 52 weeks the pair has ranged between 6.76 and 7.21. On the technical side, the 14-day RSI sits at 58, neither overheated nor oversold. An ADX near 20 signals a weak trend and range-bound conditions. The EMA20 is around 6.78, the EMA50 near 6.80 and the EMA200 near 6.94, pointing to a longer-term downtrend. Immediate support is seen near 6.76 and resistance near 6.80, reinforcing the case for the pair staying penned inside this zone in the short run.
