By This Measure, China’s Yuan Is Best-Placed Since 2012 Rally

China’s yuan is flashing the strongest technical signal since 2012 for gains against the U.S. dollar.

The onshore currency’s 50-day moving average has fallen below its 200-day mean, completing the so-called golden cross pattern that some analysts interpret as a sign that a rally will continue. While such crossovers happen frequently, this is the first time in eight years that both moving averages are trending down, a phenomenon some market watchers say signals a true golden cross.

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The dollar is heading for a fifth month of losses. Meanwhile, China’s success in restarting the economy after the pandemic, the widening of its current-account surplus, its relative yields over dollar assets and foreign inflows are all supportive of further gains for the yuan.

By This Measure, China’s Yuan Is Best-Placed Since 2012 Rally

In addition to the golden cross pattern, the currency has broken through a trend line that’s limited its gains since March 2019. The line has now become a support for the Chinese currency -- potentially limiting any losses.

Fiona Lim, a senior currency analyst at Malayan Banking Berhad in Singapore, predicts a stronger yuan and suggests investors look to the trend in the 100-day mean, now that the 50-day and 200-day averages have already completed a cross.

By This Measure, China’s Yuan Is Best-Placed Since 2012 Rally

“A decisive break below could see USD/CNH trade lower towards 6.85 levels,” she wrote.

The onshore yuan was trading little changed at 6.9409 on Thursday, holding its gains since May at 3.4%. Its offshore counterpart was at 6.9372.

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While technicals point to further strengthening, the yuan remains vulnerable to an escalation in U.S.-China tensions. With a discussion imminent on the so-called phase one trade deal between the two nations, the next several days could be a testing time for the currency.

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The yuan capped its last golden cross between the 50-day and 200-day averages in October 2012 when Federal Reserve stimulus stoked capital flows into China. The pattern was followed by an extended advance until January 2014, when a 5.9% rally ended.

Since then, the shorter average fell below the longer average four times -- in 2014, 2017, 2019 and earlier this year. But all of them had a rising 200-day mean, making them weaker signals.

There were also four crossovers between the 100-day and 200-day averages since 2012, but there hasn’t been one with both of them trending down.

©2020 Bloomberg L.P.

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