Can Renminbi investment be timed with technical analysis at all?
Technical analysis may not work with Renminbi investment
Following my article ‘Debutante Chinese Renminbi has a special date with 2015‘, I got my colleague interested to look at a long term investment in the Chinese currency. Being the technical analysis kind of person she is, this question came up: “so what does the chart say?”
Looking for high probability chart patterns in a restricted, not fully convertible Renminbi
The Renminbi is not fully convertible with other currencies yet. Inflows and out of mainland China remain restricted. It is not even legal tender in Hong Kong and Macau. What this looks like on a long term monthly price chart is a movement that looks directed instead of the zigzag pattern that we see in freely traded currencies.
The reason to apply technical analysis after all is to look for clues in price action that can predict future price movement. Technical retracements are good levels to enter trades while significant recognisable patterns lead to high probability outcomes. A price chart such as the Renminbi monthly chart we can see above is almost devoid of retracement, chart patterns. Zigzag price movements that hint at retracements and recognisable chart patterns are more evident in this daily chart of the currency below.
Note: Using USDCNH charts may be more appropriate. After all outside of China we are dealing with the offshore Renminbi CNH. In addition CNH and CNY price are not perfectly correlated and may diverge. On the other hand, the CNY chart is sufficient for my discussion here.
Long term Renminbi investment driven by policy, fundamentals
Putting both charts together, perhaps a market technician will arrive at this outcome:
- Long term movement (lack of price fluctuation) indicates Renminbi is controlled, directed
- Technical analysis merely tells it is in a trend but little other technical indication
- Its movement may be better explained by monetary policy or the currency’s fundamentals
- Short term direction looks more like charts of freely traded currencies i.e. has trade-able chart patterns
- Technical analysis will apply better in short term
Update: Renminbi vs Dollar Index (CNY vs DXY) 11 June 2013
- Renminbi does not affect the Dollar basket
- Renminbi does not care for the Dollar basket