Yuan Recovery Seen Fading as Elliott Wave Hits: Market Reversal

China’s yuan, already the worst performing Asian currency this year, can’t seem to catch a break.

Technical indicators suggest a climb that took the offshore yuan to the strongest level against the dollar in two months on June 13 is temporary and the currency is weakening again, according to Bank of America Corp. The yuan has retreated in a series of weaker and weaker intraday lows, forming the fifth and final phase of an Elliott Wave chart pattern that confirms a long-term decline.

“There’s an impulsive sequence, series of higher highs and lower lows with few overlaps, and it unfolds in a multiple of fives,” MacNeil Curry, a Bank of America technical strategist in New York, said in a phone interview yesterday.

For more than a decade, the People’s Bank of China has bought dollars to slow the appreciation of the yuan in an effort to protect exporters.

After appreciating more than 30 percent since 2005 to touch a two-decade high of 6.0406 per dollar on Jan. 14, the yuan has retreated 2.9 percent this year as the PBOC warned it may take measures to discourage one-way appreciation bets.

From the end of April, the offshore yuan, which is traded in Hong Kong, strengthened 1.1 percent to 6.2045 on June 13 as data showed the nation’s trade surplus widened and manufacturing improved.

Technical Analysis

Since then, the currency has weakened 0.4 percent to 6.2290 per dollar today as investors’ demand for riskier assets waned amid conflict in Iraq. Depreciating beyond 6.2412 will confirm the bearish trend, and the yuan may slide another 1.6 percent to as weak as 6.3395, Curry said. That would be the weakest level since September 2012.

Elliott Wave theory, created by the American accountant and author Ralph Nelson Elliott in the 1930s, seeks to predict moves in financial markets by dividing past trends into five phases, or waves. The theory proposes that a five-wave gain or decline is followed by a three-wave corrective move in the opposite direction.

To Citigroup Inc., now is a good time for investors to bet on yuan appreciation by moving back into carry trades that buy offshore yuan with borrowed U.S. dollars and invest in higher-returning assets.

“Real money inflows continued to be strong into the yuan,” Citigroup strategists led by Richard Cochinos wrote in a report on June 23. “We recommend investors to be long CNH, where positioning is light.” Long positions are bets a currency will increase in value.

Reference Rate

The dollar-yuan carry trade gained more than 18 percent between 2005 and the end of 2013 before losing 2.4 percent in the first five months of this year.

While the strategy has returned 0.4 percent this month, that may not signal a resumption of steady gains. The Chinese government’s 10-year bond yields have declined about 50 basis points, or 0.50 percentage point, this year to 4.1 percent.

The PBOC’s daily fixing of the yuan reference rate also signals the currency may be weakening again. The rate has fallen 0.2 percent versus the dollar since reaching the highest in more than two months on June 10. The yuan’s spot rate traded in Shanghai is allowed to fluctuate 2 percent above or below the official quote.

“We don’t see nearly as much as we’ve seen in the past,” Marc Chandler, the chief currency strategist at Brown Brothers Harriman & Co. in New York, said of the yuan carry trade in a phone interview yesterday. “The yield pickup isn’t all that great. Before, I’d be willing to take a lower yield if you had a currency appreciation. The depreciation earlier this year has broken the back of that game.”

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