USD/CNH: The plot thickens for the Chinese yuan

The USD/CNH exchange rate rally continued after another set of weak economic data from China. It rose to a high of 7.3323, a few points below the all-time high of 7.3483. In all, the renminbi has plunged by more than 16% from the highest point in 2022.

China trade and strong USD 

The USD/CNH and USD/CNY prices continued rising after the latest China export and import numbers. These numbers revealed that the closely-watched imports and exports continued falling in August.

Exports dropped by 8.8% after falling by 14.5% in the previous month. This decline was nonetheless better than the median estimate of -9.2%. Imports dropped by 7.3% after falling by 12.4% in July.  Like exports, this decline was smaller than what analysts were expecting.

Therefore, the trade deficit narrowed to $68.3 billion during the month. These numbers mean that the Chinese economy is not doing well since exports are a big part of the GDP.

A key part of this is that China’s trade relationship with the United States has worsened in the past few months. Many American companies have shifted their investments from China to friendlier countries like Mexico.

Still, there are some positive signs about the Chinese economy. For example, real estate stocks like Evergrande and Country Garden shares jumped sharply after the latter paid its coupon during the grace period.

The USD/CNH and USD/CNY pairs rallied because of the strong dollar. The dollar index jumped to $105 as the soaring crude oil prices point to higher inflation for a while. As such, there are signs that the Fed will hold interest rates higher for a longer time than expected.

USD/CNH forecast

I recently wrote about the USD/CNY here and predicted that the uptrend will continue. This view was correct as evidenced by the USD/CNH performance. The pair has been in a strong bullish trend in the past few months. Along the way, it has remained above the 25-day and 50-day moving averages.

The pair is also sitting at an important level since this price was the highest point on August 17th. It has also moved above the 50-day moving average while the MACD has remained above the neutral point.

Therefore, the path of the least resistance for the pair is bullish, with the next target to watch being at 7.3600, the highest point on October 2022. A break above that level will see it rise to the next resistance at 7.40.