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The People's Bank of China announced on Friday that it imposes mandatory reserves of 20% for forwarding transactions on USD/CNY, which according to the bank's position is to "stabilize the exchange rate of the yuan". The actions are undoubtedly aimed at strengthening the currency and stopping the outflow of capital from the local market. In the result, we see an increase in USD/CNY drops at 6.83, and the reversal of the earlier depreciation of the Chinese currency is reflected favorably on other currencies from emerging markets.
This is a surprising decision, which has a stronger impact, that goes into the shallow holiday market. It can be seen that the PBOC has raised concerns about the outflow of capital from the local market, but the artificial control of the currency market brings only short-term benefits. A negative side effect is limiting liquidity on the domestic market, as it limits the flexibility in the activities of local banks and institutions active on international markets.
Because the subject of China and their position in the trade dispute with the US is very important for the market participants, the yuan's rebound helps in improving the prices of other currencies against USD. Hence the last EUR/USD rise above 1.16, or GBP/USD return above 1.30 (coinciding with the publication of the NFP report). Nevertheless, the majors should not note a clear retreat in response to the one-off decision of the PBOC. Fading concerns about the prospects of the Chinese economy will be possible only when there are signs of improvement. As long as the concerns remain, it is real that investors will use such raises to renew their long positions in USD.
Let's now take a look at the US Dollar Index technical picture at the H4 time frame. The market is again trying to break out above the swing high at the level of 95.66. So far the local high was made at the level of 95.53, which was the important technical resistance for the price. Currently, the market is consolidating the gains and the level of 95.25 will now act as a technical support.
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