USD/CNY: Here’s why the yuan dropped after strong China GDP data

Written by: Crispus Nyaga
January 18, 2021
  • The USD/CNY pair rose today even after the strong economic data from China.
  • China's economy expanded by 2.3% in 2020; better than expected.
  • That's probably because the PBOC wants to devalue the yuan.

The USD/CNY is up for the fourth consecutive day even after the relatively strong economic data from China. The Chinese yuan is trading at 6.49 against the dollar, which is relatively higher than this month’s low of 6.42.

USD/CNY has been rising

China recovery accelerated

The Chinese economy had a great 2020 amid the global pandemic. The country’s economy recovered by 1.2% in the second quarter, becoming the first country to avoid a technical recession. It then rose by 4.9% in the third quarter.

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According to the statistics bureau, the country’s economy expanded by 6.5% in the fourth quarter. This was a better performance than the median estimate of 6.1%. In total, the Chinese economy grew by 2.3% in 2020.

These numbers provide further evidence that the Chinese economy is firing on all cylinders even as other peer economies struggle. The statistics bureau attributed the recovery to the rising demand for its goods. Indeed, data released last week showed that the total trade surplus widened to $535 billion; the highest figure since 2012. 

The fixed-asset investment also contributed to the strong performance of the economy. Further data showed that Chinese retail sales increased by 4.6% in December while industrial production rose by 7.3%.

Therefore, the USD/CNY is prising because of the rising number of coronavirus cases in several countries, including China. That has led to more demand for dollars, pushing the DXY up by 0.15%. Also, it is rising because of the ongoing chatter about the tightening of monetary policy in the US due to Biden’s stimulus.

Most importantly, the recent actions by the PBOC have also contributed. Two weeks ago, it set the fixing rate of the yuan at 6.4604, slightly lower than expected. Investors believe this is a measure for devaluing the yuan.

USD/CNY technical analysis

USD/CNY technical chart

Conducting a technical analysis on the USD/CNY is relatively complex since the PBOC tends to influence its performance. Therefore, consider practicing on a forex demo account before you trade. 

On the daily chart, the USD/CNY has moved up slightly in the past few days. It is trading at 6.4920, which is slightly below the 50-day and 25-day exponential moving averages. It also formed a hammer pattern on January 4. 

Therefore, the pair will likely continue rising as traders eye the US-China relations after Biden becomes president.