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March 5, 2016, 12:00 p.m. EST

The free market wins the currency war in China

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About Avi Gilburt

Avi Gilburt is author of ElliottWaveTrader.net, a live trading room and member forum focusing on Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts and wave counts that is free of personal bias or predisposition. A lawyer and accountant by training, he is also managing member of Gilburt Financial Services, LLC, which provides financial markets analysis and consulting. His Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he is a certified contributor, and TheTechTrader.com with Harry Boxer.

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By Avi Gilburt


Last fall, we wrote a series of columns for Marketwatch discussing the sudden devaluation of the Chinese currency, the renminbi or yuan. In the first column, we discussed not only the technical chart patterns that were clearly showing the 20-year downtrend coming to an end, but also the fact that for the first time in 20 years. the Chinese Central Bank (the PBOC) was being forced to sell their foreign-currency reserves in an attempt to support the yuan.

At the time of that writing, the Chinese foreign-currency reserves had already fallen by over $400 billion. Well, it now seems that after dumping $760 billion of their foreign-currency reserves, the pundits have finally accepted that, in fact, China is not actively trying to devalue their currency, but is attempting to do just opposite and support it by using their foreign-currency reserves to purchase more yuan.

What does Elliott Wave say?

The second column we wrote was more focused on the direction that we expected the USD/CNY to travel based primarily on our Elliott Wave Analysis. At that time, we had a very high degree of confidence that we would continue to move higher which in fact we did. So the question we now ask is what is next for the price of the USD/CNY.

Taking a look at our chart linked below, we can see that the high that we saw on Jan. 3 stopped right in the middle of our target box and just over one of our larger degree Fibonacci resistance levels. So, with this pattern in place, we can now say that there are enough waves in place for a local top to be in place on this currency pair and the retrace that we saw off of the Jan. 3 high is suggestive that we may have a local top in place on this pair for the top of wave ((3)) as shown on our chart.

If that top does, in fact, hold, we would expect to see a consolidation that could take us into the latter part of 2016. The support levels that we would be looking for next move down would come in at the 6.4334 - 6.3368 levels. As long as we hold over this support levels then we would expect further highs to come over the January highs.

Of course, once we see a move over the January highs, most pundits will likely be claiming that the Chinese government was successful in controlling the devaluation of their currency by intervening in markets by selling their FX reserves. We feel it is actually quite ironic, as these were the same pundits that had originally denied the fact that China was attempting to support their currency at all. We, on the other hand, will simply attribute this movement to the victor of the currency war, which is the force of the larger market.

See charts illustrating the wave counts on the USD/CNY.

Co-written by Avi Gilburt and Michael Golembesky from ElliottWaveTrader.net.

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