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Yuan continues to fall on forex against the US dollar

Yuan continues to fall in the foreign exchange market against the US dollar due to escalating concerns about China

Another day, another bad news from China. This time, national trade figures fell short of expectations. The yuan fell further in forex, bringing the USD/CNH pair closer to 7.0000, while other risky assets, from equities to cryptocurrencies, fell. The very weak performance of imports, in particular, raised concerns about the weakness of the Chinese economy as it faces challenges from multiple sources. These include ongoing COVID-related lockdowns and a real estate sector that has collapsed under the weight of debt. When China sneezes, the world usually catches a cold – and that’s how markets have reacted so far.

In case you missed it, China’s export and import figures were well below expectations, indicating weakening domestic and foreign demand. Imports rose just 0.3% year-on-year in August, a sharp decline from the +2.3% annualized value recorded in the previous month. Exports amounted to +7.1% y/y, again falling sharply from 18.0% recorded in July.

These trading numbers only add to a growing list of concerns about the health of the global economy and give investors more reason to avoid risk. The data also underscores the view that the world’s second-largest economy is weakening more than expected.

The USD/CNH pair has been rising steadily in forex as the monetary policy divergence between the US and China continues to widen. While the Fed is tightening its belt with aggressive rate hikes, the People’s Bank of China was recently forced to cut interest rates as data showed the economy was losing momentum due to further Covid shutdowns and a growing slowdown in the property market. But with the yuan weakening so much in the foreign exchange market, the People’s Bank of China tried to stem its decline with other tools, including a stronger yuan fix, and this week it lowered its foreign exchange reserve ratio from 8% to 6% to support its currency.

Theoretically, this move should increase the supply of foreign currency, making buying the yuan more attractive to market participants. However, given China’s zero Covid policy, more lockdowns are likely. Therefore, we expect that in the coming days, the yuan will fall to 7 per dollar, and possibly more.

USD/CNH daily chart

Source: Tradingview, Stone X

Technically, there are no clear signs of a reversal yet, so we can see that USD/CNH will continue its upward trajectory. The next bullish target is at 7.00 where the psychologically important level will reach the 78.6% Fibonacci retracement level versus the decline from the June 2020 peak. This peak was reached at 7.1965 which is the next target.

Text: Fawad Razaqzada, FOREX.com » Official site

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Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.

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