The negotiations between the two biggest economies are not going as well as investors hoped. Stock market indices are down across the board following President Trump’s new China tariff threat. Another side-effect was the sharp rally to over 6.82 in USDCNH.
And while Trump’s tweet about China did, indeed, trigger the surge, the actual reason for it can be found elsewhere. The stage for a recovery in USDCNH was set over a month ago by an Elliott Wave pattern we discussed on March 22nd. Take a look at the chart below to refresh your memory.
The pattern in question was a five-wave impulse, probably the best known pattern in the Elliott Wave catalog. Labeled 1-2-3-4-5, the sub-waves of wave 3 as well as those of wave (iii) of 3 were also clearly visible. According to the theory, a three-wave correction can be expected after every impulse.
In addition, there was a strong MACD bullish divergence between waves 3 and 5. So instead of joining the bears near 6.72 on March 22nd, we thought “traders can expect a three-wave recovery to lift USDCNH to at least 6.8000” in the near future. The updated chart below shows how the situation has been developing since.
A month and a half later, USDCNH exceeded 6.82, drawing three waves up in the process. Predicting what President Trump or anyone else is going to say is practically impossible. Fortunately, it is also not necessary, especially if you have an eye for the patterns the market communicates through.
What Lies Ahead for USDCNH?
Now, there are two equally probable alternatives for USDCNH going forward. The good news is they are not very different from one another. The Elliott Wave principle states that once a correction is over, the larger trend resumes in the direction of the preceding impulse. Given that the five-wave sequence on the chart above points down, it makes sense to expect more weakness soon.
How soon depends on the final structure of the recovery from the bottom of wave 5 at 6.67. Right now, it looks like a complete W-X-Y double zigzag, but can also evolve into an A-B-C flat correction. Under the first scenario we can expect more weakness in USDCNH right away. The second one suggests the bulls can climb a little higher in wave C before giving up. Both don’t bode too well for the bulls ambitions from current levels.
Did you like this analysis? Similar Elliott Wave setups occur in the stock, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!