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US dollar may rise versus yuan as central banks threaten global growth, China trade

The US dollar may rise against the Chinese yuan as hawkish central banks pose a threat to global growth, and with it, China’s external-facing economy.

Chinese yuan at risk of slowing exports as the global economy weakens

The US dollar may remain on the offensive against the Chinese yuan in the medium term despite the recent consolidation in USD/CNH. On Wednesday, the same day the Federal Reserve delivered a whopping 75-basis point rate, the offshore yuan rallied 1.24% against the greenback. That was the strongest performance for CNH since August 2019.

Better-than-expected Chinese economic data might have played a role here. In May, Chinese industrial production gained 0.7% y/y versus -0.9% anticipated. This is as retail sales shrank 6.7%, not quite as bad as the -7.1% estimate. These slightly more optimistic outcomes could be a sign that the nation is recovering from strict lockdowns earlier amid Xi Jinping’s ‘Zero-Covid’ policy.

Meanwhile, the Fed seemed to restore some credibility in its ability to tame runaway inflation overnight. Last week, unexpectedly stronger US CPI data resulted in a rapid repricing of monetary policy estimates. This is how we arrived with a 75bps hike, where just days ago only 50 were seen. Wall Street pushed higher and Treasury yields pulled back, weakening the US dollar.

Still, the road ahead remains tough for the Chinese yuan. On the chart below, CNH/USD can be seen closely following Chinese exports y/y. China’s external-facing economy means the yuan can be quite sensitive to capital flows. We saw the yuan rally throughout 2020 and 2021 as the world consumed more Chinese goods during the economic recovery from the pandemic.

Things have been changing. According to estimates from Bloomberg, Chinese exports are expected to continue materially slowing into the end of 2023 to levels before the pandemic. Hawkish central banks around the world pose a risk to global growth, and with it, China’s outward-facing economy. Thus, the case for USD/CNH may remain tilted to the downside ahead.

USD/CNH technical analysis

On the daily chart, USD/CNH is consolidating above key support. The latter seems to be a range between 6.6176 and 6.6480. Above, resistance appears to be around 6.7855 before the May peak at 6.8376 comes into focus. A confirmatory close under support could be a warning that the Yuan could have more room to recover in the short term. However, keep a close eye on the 50-day Simple Moving Average (SMA). The latter could reinstate the focus to the upside.

Daily chart

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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