The onshore yuan reached our target of 6.32 per US dollar rather sooner than expected, with the offshore exchange rate keeping neck and neck with it (the differential now nil). Observed volatility on both has increased considerably since mid-December to some of the highest levels in six months. Over the past three weeks, volume in the offshore yuan has been excellent, adding weight to our view that the market is in the process of forming a double bottom against 6.27 – or a rounded base. With the dollar being oversold and momentum extremely bearish, this is no longer the case now. Daily and weekly closes above 6.3865 will complete an interim base, allowing the dollar to rally to the 6.4725 area.

Nicole Elliott is a technical analyst