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China’s yuan is flashing the strongest technical signal since 2012 for gains against the U.S. dollar.

The onshore currency’s 50-day moving average has fallen below its 200-day mean, completing the so-called golden cross pattern that some analysts interpret as a sign that a rally will continue. While such crossovers happen frequently, this is the first time in eight years that both moving averages are trending down, a phenomenon some market watchers say signals a true golden cross.

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The dollar is heading for a fifth month of losses. Meanwhile, China’s success in restarting the economy after the pandemic, the widening of its current-account surplus, its relative yields over dollar assets and foreign inflows are all supportive of further gains for the yuan.

In addition to the golden cross pattern, the currency has broken through a trend line that’s limited its gains since March 2019. The line has now become a support for the Chinese currency -- potentially limiting any losses.

Fiona Lim, a senior currency analyst at Malayan Banking Berhad in Singapore, predicts a stronger yuan and suggests investors look to the trend in the 100-day mean, now that the 50-day and 200-day averages have already completed a cross.

“A decisive break below could see USD/CNH trade lower towards 6.85 levels,” she wrote.

The onshore yuan was trading little changed at 6.9409 on Thursday, holding its gains since May at 3.4%. Its offshore counterpart was at 6.9372.

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While technicals point to further strengthening, the yuan remains vulnerable to an escalation in U.S.-China tensions. With a discussion imminent on the so-called phase one trade deal between the two nations, the next several days could be a testing time for the currency.

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The yuan capped its last golden cross between the 50-day and 200-day averages in October 2012 when Federal Reserve stimulus stoked capital flows into China. The pattern was followed by an extended advance until January 2014, when a 5.9% rally ended.

Since then, the shorter average fell below the longer average four times -- in 2014, 2017, 2019 and earlier this year. But all of them had a rising 200-day mean, making them weaker signals.

There were also four crossovers between the 100-day and 200-day averages since 2012, but there hasn’t been one with both of them trending down.

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 The dollar weakened in early European trade Thursday, amid fading hopes for additional economic stimulus while inflation figures surprised to the upside.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 93.157. USD/JPY was down 0.2% at 106.72, GBP/USD rose 0.3% to 1.3066 and EUR/USD was up 0.4% at 1.1826.

Weighing on the greenback has been the inability of the U.S. lawmakers to come to any sort of consensus regarding the country’s latest Covid-19 stimulus package, a deal that many feel is necessary to keep the economic recovery on track.

U.S. President Donald Trump accused Democrats on Wednesday of not wanting to negotiate over the package, with Republican and Democratic negotiators trading barbs and blame as negotiations ended without a result for the fifth day.

 On Tuesday, Richmond Fed President Thomas Barkin stated that the economy could take another downturn if U.S. policymakers fail to provide more financial aid. 

He was backed up Wednesday by Federal Reserve Bank of Boston President Eric Rosengren, who said he "strongly" supported taking additional fiscal action to help businesses and households survive the crisis. But, added more spending should be combined with more robust efforts to contain the virus.

U.S. deaths caused by Covid-19 topped 166,000 as of Aug. 13, with confirmed cases rising by more than 4% in the past week, according to data collected by Johns Hopkins University.

Adding to the problems facing the dollar were the latest inflation figures, with strong numbers from both the consumer and producer sides.

"The 0.6% month-on-month increase in July core CPI was jaw dropping," Jefferies (NYSE:JEF) said in a note. "It was the largest sequential jump since January 1991. While this momentum in pricing is unlikely to be sustained, the strength was broad-based and cannot be ignored."

With the Federal Reserve already committed to keeping its benchmark rates at these very lows for some time, the pressure is building on U.S. real yields.

“Much discussed in financial markets this summer is the drop in U.S. real yields as the Fed keeps rates low, while U.S. inflation expectations are on the rise,” said Chris Turner at ING, in a research note to clients.

“Expect this macro-policy theme to play a major role in FX market pricing ahead of a possible Fed adoption of an average inflation target in September. This theme is a broad dollar negative.”

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