Well here we are, more than 2 years into the pandemic and Covid is still rattling the financial markets. Concerns about demand have intensified after Beijing locked down parts of Chaoyang District as the virus spread there. This sparked panic as people had hoped lockdowns would ease in Shanghai rather than more restrictions being imposed elsewhere. But now the prospect of the capital going into full lockdown has unsettled investors worldwide. Not only does this imply weaker demand from China, but it could also reignite supply chain problems and further exacerbate inflationary pressures.
The Chinese yuan is down for the fifth straight day, this time by more than 1%, taking the USD/CNH pair to its highest levels since November 2020. The Aussie and other commodity dollars have followed suit. Chinese stocks fell more than 5% overnight, with European and US futures also feeling the pain. Crude oil, copper and other metals fell on demand concerns.
So while the rest of the world’s largest economy tightens its belts, it looks like China will need to ease policy to keep its economy on track in the second quarter. A few months ago, China set an annual economic growth target of around 5.5%. This was the lowest level in more than a quarter century of economic planning. But given the recent lockdowns, it could be difficult to even reach that goal.
In fact, concerns about the Chinese economy caused USD/CNH to break out of a consolidation pattern last week, leading to a major bounce and subsequent technical buying in the pair (or selling in the yuan):
Source: StoneX and TradingView
Now, as long as the USD/CNH pair remains above last week’s high of 6.5477, the short-term path of least resistance would be to the upside, meaning further weakness in the yuan is likely. From here a move into the shaded area on the chart between 6.65 and 6.70 seems quite likely. Here the 38.2% Fibonacci level meets the former support-resistance area. I wouldn’t be surprised if this region offered only mild resistance before the rally resumes on expectations that US monetary policy will diverge further from China’s.
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