USD/CNY: Renminbi crashes as China recovery becomes a mirage

By:
on May 25, 2023
Updated: May 26, 2023
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  • -The USD to CNY exchange rate has been in a strong bullish trend lately.
  • -China’s economic recovery has faded as evidenced by commodity prices.
  • -The pair has also jumped because of the rising US dollar index.

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The renminbi is in a downward spiral as concerns about the Chinese economy continues. The USD/CNY exchange rate has been in a bullish trend and was trading at 7.0660, the highest level since December 2022. In all, the pair has jumped by 5.36% this year and by 12% from the lowest level in 2022. 

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Chinese recovery concerns

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Everyone was optimistic about China’s recovery earlier this year. This optimism happened as the country ended its restrictive Covid-zero policies that led to a substantially slow growth in 2022. The government also decided to end some of its regulatory crackwdow on technology companies.

Now, there are concerns that the economy is not growing as fast as was expected. For one, the real estate industry, which has long supported the Chinese economy is still not doing well. Recent data shows that home prices have been slowing for months and land sales has retreated.

The commodity market is also pointing to a slowing Chinese economy. Copper, often seen as a barometer for the economy, has been falling, as I wrote here. Similarly, other commodities like crude oil, natural gas, and coal have also slipped this year. Ideally, these commodities tend to rise when the Chinese economy is growing.

Official numbers have also pointed to a slowing economy. Earlier this month, data by the government showed that industrial production dipped in April while youth unemployment rate jumped. In a note, Quincy Krosby, the Chief Global Strategist for LPL Financial said:

“The yuan, along with weakness in industrial metals, have  been signaling continuing vulnerability in the Chinese economy as authorities grapple with geopolitical tensions, high youth unemployment, a property market mired in debt and municipal governments similarly impeded by high debt levels.”

The USD/CNY pair has also jumped because of the strong US dollar index. Data shows that the DXY index jumped to $104.1, higher than the year-to-date low of $100.87.

USD/CNY technical analysis

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USD/CNY chart by TradingView

The USD/CNY fixing rate has been in a strong bullish trend in the past few days. It managed to move above the crucial resistance point at 6.9765, the highest point on February 28th. The pair has jumped above the 25-day and 50-day exponential moving averages while the Relative Strength Index (RSI) has jumped to the overbought level of 80.

Therefore, the pair will likely continue rising as buyers target the key resistance point at 7.20. A move below the support at 6.97 will invalidate the bullish view.

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