USD/CNY: No end in sight for the renminbi meltdown

The USD/CNY exchange rate continued rising on Tuesday as concerns about the Chinese economy continued and as the US dollar index (DXY) rally accelerated. The pair jumped to a high of 7.30, a few points below the year-to-date high of 7.3150.

China economic slowdown

The biggest theme in the market this year is the slowdown of the Chinese economy. Recent economic numbers have shed light on this contraction. The youth unemployment rate has jumped to a record high.

Industrial and manufacturing output are in a contraction mode while retail sales are recovering at a slower pace than expected. Most importantly, the country’s real estate sector is crumbling while exports have plummeted.

Analysts believe that the Chinese weakness is actually weaker than expected. Historically, China, like other countries, has been known for being a bit conservative in its economic releases.

The challenge for China is that the situation is not easy to solve. For one, the real estate sector, which accounts for 30% of the economy will be hard to solve. For one, companies like Country Garden and Evergrande are collapsing.

The real estate sector has been an important engine for the Chinese economy for a long time. Today, China has over 65 million vacant houses. And most local authorities generate most of their revenues through land sales.

China is also going through a major demographic crisis following years of the one-child policy. A likely solution for this crisis would be to promote more immigration to the country. However, China tends to see more people move out than come in.

Therefore, there is a likelihood that the economic weakness will continue for a while. This explains why the USD/CNY rate has jumped by over 9% from the lowest level this year.

It also explains why the pair reacted mildly to the new measures by the PBOC to boost the yuan. Last week, the bank said that financial institutions will need to hold 4% of their foreign exchange in reserves.

USD/CNY forecast

The daily chart shows that the USD to CNY exchange rate has been in a strong bullish trend in the past few months. It managed to flip the important resistance at 7.2713 (June 30th) into support.

The pair has jumped above the 25-day and 50-day moving averages. At the same time, the Relative Strength Index (RSI) moved above the important level at 60. It is approaching the important resistance at 7.3166, the highest point on November 1st.

Therefore, the USD/CNY pair will likely continue soaring as buyers target the key resistance at 7.40. The stop-loss for this trade will be at 7.2713.