USD/CNH moved lower before stabilising, with the pair slipping to 6.7865 and then rebounding to close at 6.7911, down 0.14%. The move left the market in oversold territory, pointing to limited additional weakness in the near term. UOB expects the pair to trade within an intraday band of 6.7860 to 6.7990.
Over a 1–3 week horizon, the earlier positive bias has been reversed after USD/CNH broke below the 6.7900 support level, shifting the outlook from an uptrend to consolidation. UOB now sees trading most likely contained between 6.7750 and 6.8080, after the pair was at 6.8030 on 29 Jun and had previously been seen as having scope to move towards 6.8300. On a medium-term view, a recovery would require a break above the 21-week EMA at 6.8430.
Shift To Consolidation And Strategy Implications
The earlier bullish view on the US dollar has ended, as the pair broke below the key 6.7900 support level. We now believe the USD/CNH is entering a period of consolidation. This shift requires us to change from directional bets to strategies that profit from a sideways market.
For the next one to three weeks, we expect the pair to trade within a range of 6.7750 and 6.8080. This makes selling options premium an attractive strategy for derivative traders. This view is supported by the People’s Bank of China, which has been actively managing the yuan’s value to prevent excessive volatility, discouraging any strong directional trend.
Options-Based Approach And Supporting Fundamentals
Specifically, we are looking at selling call options with strike prices above the 6.8080 resistance level and selling put options below the 6.7750 support. This type of strategy, like a short strangle, profits from low volatility and the passage of time. The latest CNH HIBOR fixings, which remain low and stable, suggest there is little funding stress in the offshore yuan market to drive a breakout.
This perspective is strengthened by recent economic data. China’s latest Caixin Manufacturing PMI reading came in at 51.7, beating expectations and signaling a stable economic recovery that supports the yuan. Meanwhile, recent US inflation figures showed a slight moderation to 3.1%, reducing pressure for aggressive Federal Reserve action and capping dollar strength.
We are also watching implied volatility on USD/CNH options, which has fallen to a multi-week low of just 4.5%. This indicates that the market is not pricing in any large price swings in the near future. This low volatility environment is historically favorable for strategies designed to profit from a lack of movement.
While our primary strategy is range-bound, we will monitor the 21-week exponential moving average around 6.8430. A decisive break above this level would invalidate our consolidation view and signal a return of dollar strength. Until such a move occurs, we will continue to trade the expected range.
