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The Chinese Yuan: All Signs Pointed Down... Except One

See what indicator suggested a “potential top” on January 3, one day before the yuan’s recent top

by Nico Isaac
Updated: January 18, 2017

With just three weeks in, 2017 has already seen some major moves in global financial markets. Leading the transformation train has been China's currency, the yuan, which has undergone a rapid and dramatic turnaround almost no one expected to see.

Here's a recap:

When 2016 came to an end, the Chinese yuan had clocked its worst annual performance in 22 years, plunging nearly 7% to finish at an 8.5-year low. And, according to many sources, the road to gains seemed paved in quicksand, thanks to a litany of bearish forces set to weigh the renminbi down.

Off the top were these yuan-crippling factors:

  • The U.S. Federal Reserve's first interest rate hike in a year on December 14
  • A rising U.S. dollar, which stood at a 14-year high against basket of global currencies
  • Ongoing uncertainty and anxiety surrounding U.S.-China political relations in light of President-elect Donald Trump's public accusations of Beijing as a "currency manipulator," his threat of 45% import tariffs on Chinese goods, and his initiation of the first phone call with rival Taiwan's president since 1979
  • Hemorrhaging of money leaving China, with a near-record high in capital outflows
  • And the fifth consecutive month of decline in the People's Bank of China's foreign exchange reserves to a five-year low

Add them up, and the yuan's future seemed decidedly wan. Here, these news items from December 2016 capture the bearish scene:

  • The yuan's "pressure will continue with the prospect of higher interest rates in the U.S."
  • "Market bears smell blood as China scrambles to plug capital outflows. Depreciation triggers capital flight and capital flight exerts even bigger pressure on the yuan."
  • "Traders expect little respite leading into the Lunar New Year holidays at the end of January, a period in which demand for cash is high. We should raise our alert system... and promptly enact our crisis management plant to fight the currency wars."

All fundamental signs pointed down.

But in our January 3 Asian-Pacific Short Term Update, editor Chris Carolan recorded a special video update on the yuan/dollar exchange rate that showed the Elliott wave perspective.

And that perspective saw the yuan's two-year long decline (and rally in the U.S. dollar) coming to an end:

"We've been very bullish for -- well, years now, actually -- but something concerns me, and I think I need to look at a possible top forming soon.

"Here's the daily chart showing both offshore and onshore yuan prices and the spread between them is showing the weaker offshore exchange rate as driver of this dollar rally and yuan deceleration. From an Elliott-wave standpoint, here's our count: one, two three, here's that very nice triangle, four, and we go one, two, three, four from there. The implication is we're now in wave five of five of five.

"It's probably increasingly dangerous to be too bearish on the yuan here. It suggests we're coming into a potential top... and this dollar rally with the yuan is potentially running out of steam here."

The next day, the yuan reversed course and embarked on its sharpest two-day rally ever -- the start of a powerful uptrend that has taken the currency to fresh 2017 highs (falling chart pattern indicates rising yuan):

And as a reminder of how far-reaching the implications of dramatic changes in China's currency are to the global financial welfare, we have one word: Bitcoin.

The digital vundercurrency has outperformed every single major banknote on the planet two years in a row. And, it just so happens to enjoy (or endure, depending on the move) a strong correlation with the Chinese yuan. Here, our Asian-Pacific Short Term Update illustrates the positive correlation:

On January 5, amidst the yuan's super spike, bitcoin plummeted 20%, sending shock waves through the trading community. Wrote Reuters:

"Given that the yuan's weakness over recent months seemed to correlate with bitcoin's strength more than any other currency's, it's no surprise that bitcoin traders have reacted the way they have to the yuan's sudden strength."

Signs of where the yuan is headed next won't be found in the news on China's capital outflows or Trump's next big message to Beijing. They'll appear directly on the currency pair's price chart, as Elliott wave patterns.

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