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Chinese Yuan: How One Forecasting Tool Nailed the Rally

See Elliott waves at work in emerging markets

by Alexandra Lienhard
Updated: June 05, 2017

In this new interview, Chris Carolan, our Global Opportunities Expert and editor of Asian-Pacific and European Short Term Updates shows you what helped him forecast the recent strength of the Chinese yuan against the U.S. dollar.


Alexandra Lienhard: Chris Carolan, Elliott Wave International's Global Opportunities Expert and the editor of EWI's Asian-Pacific Short Term Update and European Short Term Update is joining me today on ElliottWaveTV. Hi, Chris. Nice to see you again.

Chris Carolan: Nice to be here, Alexandra.

AL: The Chinese yuan is at its strongest level in six months against the US dollar. And that's something you've been forecasting for a few weeks now, if not the last month or two, and pretty aggressively at that. So Chris, what led you to this call?

CC: Well, our primary tool for tracking this market has been the Elliott Wave Principle. And the yuan was in a triangle for a number of months, and triangles are continuation patterns. And they occur in the middle of moves. And there was a sharp rise in the yuan and dollar drop in early January. And once the triangle formed, we expected then a second sharp rally in the yuan and dollar drop to occur because of how we view triangles within the Elliott wave theory.

AL: Now, was this a yuan move or a dollar move?

CC: Well, I think it's a bit of both. And also, let's keep in mind now, what the yuan rally has done -- it's a three-wave move since January, and this is the third part of that. And those are corrective moves against the still larger trend. So when we look now at the dollar and the yuan in the long term, I think the Chinese do want the yuan to go lower. But in the shorter run, they also want to dampen speculation against a falling yuan. They don't want people betting on a weaker currency. And so, by helping push the yuan up, they're dampening that speculation. But you know, when governments try to move markets around, it often doesn't work. But if you're trying to move the market in the same direction where the wave is going, then it becomes easier. And so, you know the wave said, hey, the yuan is going to be rallying soon and sharply. And when the government gives it a little nudge, as I think they did here, then it all comes together pretty quickly.

AL: Now, Chris, the PBOC, the People's Bank of China, tinkered with the fix for the daily yuan rate. Did that play into this at all?

CC: Well, yes, I think it does. And they have more than one tool to tinker with, with the exchange rates. And their other tool is the repo rate. And they pushed their short-term interest rates up sharply recently. And again, what that did is it forces the speculators who were betting against their currency to get out of it. It punishes them. So they have a few tools to move things around short term, and it looks like they use them. But again, you can't push markets in directions they don't want to go. And the Elliott wave setup here was pretty clear that the yuan was ripe for the sharp rally.

AL: And, Chris, you've been a strong advocate on the importance of understanding currency movements in relation to equities. Is this the same thing for China?

CC: Well, yes and no. And you know...

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