USD/CNY: The Yuan Jumps as China Growth Story Goes On

The USD/CNY price declined by more than 0.35% on Wednesday after China delivered relatively strong manufacturing and non-manufacturing PMI data. It fell to 6.55, slightly below the year-to-date high of 6.5793. 

China strength continues

China has had a strong recovery from the pandemic. While it was the first country to report the coronavirus case, it became the first major country to emerge from it. The economy bounced back in the second quarter – and the trend continued in the past few quarters. 

This growth was mostly because of the rising demand for the country’s manufactured goods as most countries went through lockdowns. Further, the massive stimulus packages offered by the United States and other countries also helped propel the Chinese economy. Additionally, most of the funds offered by governments went on to buy Chinese-made items.

After going through a slowdown in February because of the Lunar New Year, the Chinese economy seems to be bouncing back. According to China Logistics, the country’s manufacturing PMI increased from 50.6 in February to 51.9 in March. This growth was better than the median estimate of 51.0. 

The important non-manufacturing sector also did well, with the PMI rising from 51.4 to 56.3 as demand for services rose. This led to the total composite PMI rising from 51.6 to 55.3. A PMI reading of 50 and above is usually a sign that the industry is expanding. These numbers came a day before the Caixin manufacturing PMI. Analysts expect the data will show that the PMI rose from 50.9 in February to 51.3 in March. 

Stronger yuan

Ironically, the recent Chinese recovery has happened at a time of a stronger yuan. The USD/CNY has dropped by more than 8% from its highest level in 2020.

In theory, a stronger yuan should be negative for the Chinese economy because of its reliance on exports. When the yuan strengthens, it makes the country’s goods expensive, making them unattractive for the buyers. 

Most importantly, the People’s Bank of China (PBOC) has been relatively reserved by allowing the yuan to strengthen. In the past, the bank used to intervene when the yuan got extremely strong in a bid to boost its businesses. Analysts believe that the current trend is mostly because the bank wants the yuan to be widely accepted across the world. 

This year, the USD/CNY price has been rising, helped by the relatively strong US dollar. Indeed, the dollar index has jumped by more than 3%, helped by the rising US bond yields and the return of the risk-off sentiment. 

The market believes that the recent stimulus in the US, upcoming infrastructure spending, and the vaccine progress will push the Federal Reserve to implement higher interest rates. Such rates are usually positive for the US dollar. 

USD/CNY technical forecast

The USD/CNY pair has been in a strong upward trend in the past few months because of the stronger dollar. It rose to 6.5796 in March, but it has dropped slightly to the current 6.5530. On the four-hour chart, the price is slightly above the important resistance level at 6.5435, which was the highest level on March 9. It has also crossed the 25-day and 15-day moving averages. 

Therefore, in the near term, it seems like bears will be in control as they attempt to move back to the cup zone of the cup and handle pattern. However, in the longer term, the upward trend may continue.