USD/CNY forecast: Will China let renminbi crash during the trade war?

The USD/CNY exchange rate rose to a high of 7.30 this week, its highest point since February as the trade war escalated. It has jumped by 0.87% from its lowest level this year, and some analysts believe that it could surge to 10 in the coming weeks. 

China could devalue the renminbi

The US and China embarked on the most significant trade conflict in years this week. Donald Trump, citing bogus numbers, announced that the US would levy a 34% tariff on all goods imported from China. That is on top of the tariffs he announced in his first term and the 20% he launched after being re-elected. 

Not to be outdone, China also announced retaliatory tariffs and other measures to punish the US. All goods imported from the US, potentially including Boeing planes, will receive a 34% tariff. China will also restrict the import of some American goods and add more companies in its entity list. 

These measures mean that the trade conflict between the two biggest economies will escalate. Analysts believe that Trump may decide to intervene by adding more tariffs on goods from China. 

China is expected to work hard to cushion its economy. It may decide to increase its stimulus measures, especially in the manufacturing industries. Most importantly, China may decide to devalue its currency, a move that will help to offset the impact of tariffs.

China is the biggest exporter in the world, with most of it trade involving the renminbi and the US dollar. In this case, while importers to China pay more, exporters appreciate a weaker renminbi because it makes their goods a bit cheaper. 

Beijing has allowed the local currency to weaken in the past few months as the USD/CNY exchange rate rose from 7 in September last year to 7.27 today. 

Potential Federal Reserve rate cuts

China’s desire to have a weaker renminbi is coming as the US also wants to devalue the dollar a bit to make its exports cheaper. 

Trump and his officials have come up with an unofficial proposal known as the Mar-a-Lago Accord that aims to force countries to accept a weaker US dollar and lower interest rates on their US Treasury investments. Countries that accept this to happen would then be protected by the US.

One way the US can devalue the US dollar is for the Federal Reserve to cut interest rates. While Jerome Powell has hinted that the Fed will not cut rates, analysts believe that it is just a matter of time. This is the message that the US bond yields are sending after plummeting to the lowest level in months. 

Goldman Sachs analysts predict three rate cuts later this year, higher than the two that the Fed has hinted.

USD/CNY technical analysis

The daily chart shows that the USD/CNY exchange rate has rebounded in the past few days, moving from a low of 7.2176 on March 12 to 7.28 today. It has moved slightly above the key resistance at 7.2765, its highest level on June 24. 

The 50-day and 25-day Exponential Moving Averages (EMA) have formed a bullish crossover pattern. Also, the Relative Strength Index (RSI) has pointed upwards.

The pair has formed a small inverse head and shoulders pattern, a popular bullish sign. Therefore, the path of the least resistance is upwards, with the initial target to watch being at 7.3325, its highest level in January. A move above that level will point to more gains, potentially to 8.