USD/CNH continues to edge lower after China’s fifth plenum, mixed manufacturing data

<p>Plenum – an assembly of all the members of a group or committee Late last week, China wrapped up the “Fifth Plenary Session of the […]</p>

Plenum – an assembly of all the members of a group or committee

Late last week, China wrapped up the “Fifth Plenary Session of the 18th Central Committee of the Communist Party of China.” In case you don’t follow politics closely, this mouthful of a meeting just means that all the leading members of China’s Communist Party came together to discuss social, economic, and environmental policy over the next five years.

The attention-grabbing headline to come from this gathering was the news that the country would be relaxing its one-child policy: effective immediately, all married couples are now allowed to have two children. In practice though, this reform will have only a minimal impact, as any parents who were single children themselves (most of them) were already allowed to have two children. While the decision does signal that Chinese leadership is taking action to address the country’s demographic issues, the actual impact on the workforce obviously won’t be felt for another two decades when those new children grow up.

Beyond the decision to relax the one-child policy, Chinese leaders also decided to broaden the country’s “old age insurance” program, take steps to foster business innovation, move toward a “cap-and-trade” system for carbon emissions, and broadly continue to facilitate the transition from a manufacturing-led economy to a more consumer-driven one.

Speaking of manufacturing, the latest reading on Chinese industrial activity came out mixed over the weekend. The official government Manufacturing PMI reading came out at 49.8, showing essentially flat manufacturing activity in October, while the “third-party” Caixin Manufacturing PMI figure came out worse (as is its wont) at 48.3, indicating a modest decline. While these readings were by no means strong, they each improved over last month’s troughs, suggesting the worst of China’s economic slowdown may be behind us.

Technical View: USD/CNH

This is usually where we’d insert our standard disclaimer that China’s currency is not free-floating, so technical analysis tends to be less effective, but the country also decided to shift its exchange rate policy to a more market-determined rate in August, so those concerns are fading. Looking at the chart, USD/CNH predictably spiked in the wake of that decision (showing weakness in China’s yuan), but since then, USD/CNH has actually been trending clearly lower for nearly three months.

Traders were encouraged by the results of China’s 5th plenum, taking the pair down from 6.40 toward 6.35 as of writing, and in our view, the pair could continue to grind lower in the days and weeks to come. To the downside, the next level to watch will be the 78.6% Fibonacci retracement at 6.30; if that level gives way, USD/CNH may retrace the rest of the “exchange rate reform rally” back toward 6.20. At this point, only a break out of the channel at 6.40 would shift the bias back to the topside.

USDCNHDAILY11-3-2015 8-36-12 AM

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.