AUD/USD joins the yuan for the ride, though FX volatility cuts both ways

It has been a volatile week for FX traders so far this week. Monday kicked off with a weaker US dollar and notably stronger yuan and Canadian dollar, simply because Trump didn’t announce imminent tariffs order on China and Canada via executive orders. Yet we have since seen two volatile U-turns on USD/CAD after Trump revealed he intends to place a 25% tariff on Canada and Mexico by February 1^st.

But why just Canada and not China? Well, it seems some backroom deal could already be under way. China’s Vice President has announced at Davos that China “wants to import more competitive, quality products and services to promote balanced trade”, adding that “we don’t seek trade surplus”. This has allowed the yuan to strengthen against the weaker US dollar, in a much more efficient way than the Canadian dollar could.

But it is also good to remember that volatility cuts both ways, especially when Trump is at the helm waving his executive-order pen. And a cursory glance at Tuesday’s moves for FX pairs show how some CAD, CHF and JPY pairs far exceeded their average daily ranges yet still closed flat for the day.

Economic events in focus (AEDT)

• 11:10 – AU Leading Index (MoM) (Dec)         
• 19:00 – World Economic Forum Annual Meetings
• 02:00 – US Leading Index (MoM) (Dec)
• 02:15 – ECB President Lagarde Speaks

USD/CNH technical analysis:

USD/CNH has clearly met resistance around the 2022 and 2023 highs and bearish momentum has accelerated to the downside. The offshore yuan has already risen 1% against the US dollar this week, which places it on track for its best week in nearly six months and its most volatile in 11.

And if deals are made and tariffs are not as aggressive as originally feared (a scenario I floated multiple times last year), the US dollar and therefore USD/CNH could fell further.

USD/CNH is trying to hold above the monthly S1 pivot (7.2607) and HVN (high-volume node) at 7.2472. Tuesday’s candle is also close to confirming an inverted hammer and the daily RSI (2) is oversold, which suggest at least a small bounce could be due. But if the relationship between the US and Chine is as warm as it initially appears, bears could seek to fade into moves towards 7.3 and the July high in anticipation of its next leg lower.

AUD/USD technical analysis:

As mentioned in Monday’s AUD/USD outlook report, where the yuan goes AUD/USD follows. So it is no major surprise to see AUD/USD rising against its trend while USD/CNH falls from resistance.

The weekly chart shows that the RSI (14) reached oversold earlier this month, before prices reversed from a false break of the 2022 low. A bullish divergence also formed on the daily chart ahead of false break, and a higher low has since formed on prices. From here, bulls could seek dips towards the 10/20-day EMAs just above 0.6210 and retain a bullish bias while prices remain above the 2022 low.

0.6348-71 (August low and volume node) makes a potential resistance for bulls to consider, a break above which brings the 65c into view near the HVN of the drop from the September high to January low.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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