USD/CNY: Chinese yuan rallies on widening US twin deficit

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his wife, son,… read more.
on Feb 10, 2021
  • The USD/CNY has dropped to the lowest level since 2018.
  • The pair has dropped by more than 10% since May last year.
  • Investors fear that the US budget and trade deficit will keep widening.

The USD/CNY price is hovering near the lowest level since June 2018 because of the weak US dollar and the strength of the Chinese economy. The pair is trading at 6.4382, which is slightly above the year-to-date low of 6.4205.

USD/CNY
USD/CNY price action

Chinese yuan strength continues

The Chinese yuan has been on a strong uptrend in the past few months. The currency has gained more than 10% against the US dollar from May last year.

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This trend has happened mostly because of the strong recovery of the Chinese economy and the weak dollar. After slumping in the first quarter, the Chinese economy bounced back in the second quarter and continued the trend for the rest of the year. This performance was partly due to strong demand for Chinese goods like masks and other health-related products.

The USD/CNY also declined because of the weak dollar. The dollar index has slumped by more than 9% from its highest level last year. The currency weakened mostly because of the rising US twin deficits and the actions of the Fed. 

In recent months, the US has ramped-up its spending while tax revenue decline. This year alone, the government has borrowed more than $900 billion to implement the first stimulus package. And now, the Biden administration is in the process of enacting another $1.9 trillion stimulus. 

At the same time, the US trade deficit has continued to widen. In 2020, the country recorded a record $687 billion trade deficit up from the previous $576 billion. And this trend will continue as lockdowns continue in the country.

Most importantly, the People’s Bank of China (PBOC) has avoided intervening in the currency market lately. This is because the strong yuan has not had a major impact on the country’s exporters. Analysts believe that the PBOC is attempting to make the currency attractive to foreigners.

Earlier today, China released relatively mixed inflation data. While the headline consumer price index (CPI) fell to 0.3%, the producer price index (PPI) rose to 1%.

USD/CNY technical outlook

USD/CNY
USD/CNY technical chart

The USD/CNY price formed a double-top pattern at 7.1870. On the weekly chart, the price has moved below the 50-week and 100-week exponential moving averages and the Ichimoku cloud. The Relative Strength Index (RSI) has also moved below the oversold level of 25. Therefore, the pair may continue falling as bears target the next support at 6.400. Still, consider practicing in a forex demo account because of the potential volatility of the pair.

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