USD/CNY: Yuan rally gains steam as China starts interventions

Written by: Crispus Nyaga
January 6, 2021
  • The USD/CNY pair dropped sharply today even as China started to intervene.
  • The pair has dropped by more than 10% from its highest point last year.
  • The decline today is also partly due to the weak US dollar.

The USD/CNY dropped to the lowest level since June 2018 even as China moved to curtain the strength of the yuan. It is trading at 6.4525, which is 10% below last year’s double-top at 7.7165.

USD/CNY
USD/CNY has been in a downward trend

China moves to intervene in the forex market

The Chinese yuan has been on a strong trend in the past few months. This performance has been driven by the risk-on approach to the market and the overall strength of the Chinese economy. Indeed, most sectors of the country’s economy have already recovered. 

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At the same time unlike in the past, the People’s Bank of China (PBOC) has taken a relatively passive approach. It has stayed on the sidelines and let the yuan strengthen, which hurts its exporters. This approach has mostly been because the country wants to boost confidence in the yuan.

This is about to change. According to Bloomberg, the PBOC set its fixing rate at 6.4604, which was about 0.06% weaker than the estimate. This came a few days after the communist party allowed more mainland companies to make more loans abroad. Also, a newspaper backed by the state cited analysts who said that the yuan strength will start to slow.

Earlier today, Caixin reported that the Chinese services PMI dropped to 56.3 in December from 57.8 in the previous month. This happened as demand, optimism, and employment continued to improve.

Weaker dollar persists

The USD/CNY pair is also reacting to the overall weaker US dollar. The dollar index has tumbled by more than 0.20% today after the Democrats flipped the Senate. The index is trading at $89.25, which is slightly above the lowest level in 2018.

The currency has weakened mostly due to the risk-on sentiment in the market. Further, today, it has dropped because of the outcome of the Georgia election. In it, the Democratic party candidates did well, meaning that Biden will have the power to actualise his agenda. This includes a higher minimum wage, more stimulus, and higher corporate taxes.

USD/CNY technical outlook

USD/CNY
USD/CNY technical chart

On the weekly chart, we see that the USD/CNY has been on a strong downward trend in the past few months. It has moved to below the 61.8% Fibonacci retracement level and the 50-week and 25-week moving averages. Also, the two lines of the Stochastic oscillator are below the oversold level. 

Therefore, in the near term, the pair will likely continue to drop. However, since the yuan is a relatively controlled currency, you should consider practicing in a forex demo account before you trade it.