China A50, USD/CNH: Prime reversal candidates should US economic exceptionalism falter

• China’s economic performance has failed to live up to the reopening hype after the pandemic
• The A50 share index and CNH have been particularly hard hit, hit by concerns surrounding China’s property sector
• If US yields and dollar continue to soften, it usually helps emerging markets outperform

It’s been a rough year for Chinese markets with the A50 share index and CNH down sharply as hopes for booming economic activity coming out of the pandemic failed to materialise. Throw in concern about the financial health of China’s massive property developers and it’s little wonder investors have shunned stocks and currency. There have been far easier and less risky investment opportunities elsewhere.

US economy may be at a turning point

But the tide may be starting to turn, helped by signs the era of US economic exceptionalism may slowly coming to an end, resulting in a softer US dollar and large decline in US interest rates, creating a release valve on beaten-down emerging market assets.

While there is still uncertainty towards the US economic outlook, whether inflation will return to target and how the Federal Reserve may respond, as conveyed last week, there’s growing evidence to suggest US yields may have peaked for this cycle.

And that has implications for emerging markets

If that’s the case, creating headwinds for the US dollar in the absence of a large economic or financial shock, it will potentially have massive ramifications for emerging markets who typically outperform in an environment of lower bond yields and US dollar. And with valuations rock-bottom and sentiment not much better, Chinese asset standout when it comes to reversal potential.

China A50 a blueprint for broader China sentiment

China’s A50 daily chart reads likes book on sentiment changes towards China before, during and post the removal of covid restrictions, ripping higher in late 2022 before giving it all back, and more, as the reopening boom turned to bust.

However, as US Federal Reserve officials curtailed rate hike talk in favour of letting market forces finish the job of defeating inflation, the index has popped higher over the past few weeks, aided by ongoing speculation about new economic support measures being rolled out by the government and People’s Bank of China (PBOC).

Having punched through minor resistance located around 12100, the A50 is now tangoing with its 50-day moving average, a level it has failed to break over the past couple of months, with more pronounced resistance located just above around 12350. While RSI and MACD have broken their downtrends, with the latter also crossing the signal level from below, to get really excited about the prospects for the index, you’d like to see it break convincingly back into the sideways channel it was operating in earlier this year. That would help to improve risk-reward for long positions, aiming for at least a test of downslope resistance dating back several years.

Right now, this could easily be just another bear market rally.

USD/CNH starting to look constructive on the charts

USD/CNH has endured a performance not dissimilar to the A50 with the yuan hammered this year on the back of US dollar strength. Without ongoing support from the People’s Bank of China to pushback against market forces, it too would’ve likely hit fresh cyclical lows earlier this year.

However, following the large decline in bond yields across the US curve last week, USD/CNH broke not only minor uptrend support but also sliced through its 50-day moving average, a level it has respected on occasion in the past. The move stopped at 7.2700, resistance level that’s successfully repelled probes lower since August. Should 7.2700 give way, there’s not a lot of major support evident on the daily until we get back to 7.0000, allowing traders to enter short positions with a stop above 7.2700 for protection.

For those considering the trade, keep a close eye on US bond yields and upcoming Chinese economic data, including trade, CPI/PPI and monetary aggregates this week. A combination of falling US yields and improved Chinese activity could prove to be a powerful mix.

-- Written by David Scutt

Follow David on Twitter @scutty

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