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Last week, the US saw Non-Farm Payrolls increase by 223,000 for the month of December.  In addition, the Unemployment Rate decreased to 3.5% from 3.6% in November.  This was the lowest rate in 50 years.  However, markets focused on the Average Hourly Earnings component of the data, which fell to 4.6% YoY vs 5% YoY expected.  This is the smallest increase in wage earnings since August 2021.  The November print was also revised lower from 5.1% YoY to 4.8% YoY.  US ISM Non-Manufacturing PMI for December, also released on Friday, was 49.6 vs an expectation of 55 and a November print of 56.5.  This was the first contraction (under 50) for the reading since May 2020. The US Dollar sold off aggressively follow the jobs data release and continued lower after the PMI data. 

This week, Powell will join a panel at a symposium hosted by the Riksbank, titled, “Central Bank independence and the mandate – evolving views”.  Traders will be watching to see if Powell expands on his hawkish views from the last FOMC meeting, or if he is less hawkish due to Friday’s data.  In addition, the US will release CPI for December.  Expectations are for a print of 6.5% YoY vs a November print of 7.1% YoY.  The Core CPI is also expected to drop to 5.7% YoY from 6% in November. A higher reading may increase the chances of a 50bps increase at the February 1^st meeting and a lower reading may increase the chances of a 25bps reading. 

China is likely off to a rough economic start to the year due to the rapid spread of Covid after the government aggressively lifted lockdowns and restrictions across the country.  However, traders seem to be looking passed the reopening for stronger economic growth down the road.  Beijing’s acting mayor said on Monday that the city has passed the Covid infection peak, thus many are hoping for Covid infections to slow in the country sooner rather than later. The PBoC said that it stands ready to provide further support to households and companies to help recover after the zero-covid policy. Last week, China said that could ease the “three red lines” property rules that will allow property firms to add more leverage.  This would also push back the grace period for meeting debt targets. China also removed almost all restrictions regarding international travel as tens of thousands of travelers began to fly outbound and inbound to China.  All these post-Covid measures should help economic growth.  As a result, the Chinese Yuan has gone bid.  (As with the US, recall that the reopening was inflationary, which caused the US Dollar to rise).  China will also release CPI for December this week.  Expectations are for an increase to 1.8% YoY vs a November reading of 1.6% YoY. 

USD/CNH made a high of 7.3748 on October 25^th, 2022, as concerns about lockdowns and restrictions in China due to Covid were also at a high.    The pair formed an ascending wedge on the daily timeframe and finally broke lower on November 10^th, 2022, as US CPI for October was much weaker than expected.  The pair bounced from prior lows on October 5^th at 7.0125 into the last week of November to 7.2571. Since then, USD/CNH has been moving lower in a bearish flag formation, trading most of December between 6.9369 and 7.0125.  However, as the new year began and China announced the lifting of its “zero-Covid” policy, USD/CNH began moving lower again.  On December 30^th, 2022, the pair broke below the bottom trendline of the pattern near 6.9369 and hasn’t looked back.  On Monday, the pair made an intraday low of 6.7660, its lowest level in almost 5 months.

Source: Tradingview, Stone X

On a 240-minute timeframe, after breaking below the flag, the USD/CNH also broke through the 50% retracement from the lows of February 24^th, 2002, to the highs of October 25^th, 2022, at 6.8412. The pair is on its way to the flag target near 6.6722. However, to get there, price must first pass below the 61.8% Fibonacci retracement level from the same timeframe at 6.7153.  Horizontal support below the target crosses at the June 3^rd lows of 6.6164.  Notice that the RSI is in extremely oversold territory near 17.94.  This indicates that the pair may be ready for a bounce.  First resistance is at prior support dating to May 13^th, 2022, at 6.8382. Above there, USD/CNH can more to resistance at 6.8785 and then to the bottom trendline of the flag pattern at 6.9369.

Source: Tradingview, Stone X

With Fed Chairman Powell speaking this week, along with CPI from both the US and China, USD/CNH could be volatile.  Will the pair continue to move lower?  If the US continues to see lower inflation data or if the end of China’s “zero-Covid” policy happens sooner than later, the pair could quickly move lower.

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