USD/CNY: Here’s why the yuan is heading to 6.70 – Goldman Sachs

USD/CNY: Here’s why the yuan is heading to 6.70 – Goldman Sachs
Written by:
Crispus Nyaga
16th July, 04:41
  • The USD/CNY pair is little changed today as traders react to the strong economic data from China.
  • Data from the statistics office showed that the country expanded by 3.2% in the second quarter.
  • Analysts at Goldman Sachs and Morgan Stanley have mixed views about the Chinese yuan going forward.
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The USD/CNY pair is little changed today as traders react to the latest GDP data from China. The pair is trading at 6.9960, which is slightly higher than the intraday low of 6.9826. Analysts at Goldman Sachs expect the yuan will rise to 6.70 against the dollar.

USD/CNY unchanged after strong GDP data

China returns to growth

The USD/CNY pair remained relatively unchanged after China became the first major economy to return to growth in the second quarter. Preliminary data from the statistics office showed that the economy grew by 3.2% from a year earlier as the country continued to reopen. This number was a surprise to analysts, who were expecting the economy to expand by 2.5%.

The economy expanded by 11.5% from the first quarter, which was higher than the expected 9.6%. Still, the world’s second-biggest economy in the world, declined by 1.6% in the first half compared with the first half of the year. In the statement, the bureau said:

“The national economy overcame the adverse impact of the epidemic in the first half gradually and demonstrated a momentum of restorative growth and gradual recovery.”

This growth was expected when you consider the recent numbers from the country. For example, a month ago, Bloomberg reported that the country’s oil demand had come back to pre-crisis levels. Also, data released this week showed that the country’s exports rose sharply in June. Similarly, manufacturing and services PMI numbers released this month showed strong progress.

According to the statistics office, fixed asset investments declined by 3.1% in June after falling by 6.3% in the previous month. The industrial production rose by 4.8% after rising by 4.4% in May while retail sales dropped by 1.8%.

Outlook for the USD/CNY mixed

While the Chinese economy has recovered, the rising tensions between the US and China has complicated the outlook for the USD/CNY. Just this week, Donald Trump signed into law a bill that will sanction officials because of the controversial Hong Kong security law. This came a week after the country sanctioned some officials because of the human rights issues in Xinjian.

Some analysts expect that China will use currency as a tool during this crisis. It could do that by strongly weakening the currency, which will help its exporters. In a statement, an analyst at Goldman Sachs predicts that China will push the USD/CNY pair down to 6.70. He said:

“If I could set those aside (tensions), and I think when you look 12 months ahead you can look through that to some degree. I think it actually does look like a pretty reasonable outlook for the yuan here (6.70).”

In another report, analysts at Morgan Stanley believe that China will not use its currency aggressively. He argued that the country wants its currency stable, if it was to compete with the US dollar as a reserve currency. He said:

“I think there’s another trend that’s emerging. China doesn’t want its currency to be that volatile, or be seen to be a currency which is not seen to be stable enough to be a long-time venue for being a reserve currency.

USD/CNY technical outlook

USD/CNY technical forecast

The USD/CNY pair is trading at 6.9960, which is significantly below this year’s high of 7.1763. On the daily chart, the pair is below the 50-day and 100-day exponential moving averages. The pair is also slightly below the 50% Fibonacci retracement level. Further, the pair is along a strong downward trend as evidenced by the black trend line below. Therefore, the pair is likely to continue falling as bears target the 61.8% retracement at 6.9715.

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