The Chinese yuan (CNY) has marked its sixth consecutive month of decline against the US dollar (USD), reaching a new seven-month low against the USD. This marks the sixth consecutive month that the CNY has been in a downward trend.
The value of the yuan decreased to 7.2630 against the dollar during early trading on June 25. This represents the lowest level since November 2023. The People's Bank of China's (PBOC) policies and shifts in the global economy are both reflected in this trend, which reflects the broader impact of both.
Policies enforced by the PBOC and domestic challenges
The PBOC decided to set the daily midpoint of the yuan at 7.1225 per dollar, which is the lowest level since November 2023 and falls short of what the market anticipated.
This move is indicative of the strategy that the central bank is employing in order to manage the currency in the face of various economic pressures, such as the outflow of capital and the strength of the dollar.
💹 USD vs CNY (Chinese Yuan): the US dollar’s strength against the yuan leads to cheaper Chinese imports, aiding in inflation control. However, it pressures US exporters competing in China, likely requiring further strategic policy interventions. #China #TradeBalance pic.twitter.com/duH9KGGXlg
— siddy jobe (@SiddyJobe) June 25, 2024
A possible strategy to allow further depreciation of the yuan is suggested by the People's Bank of China's fixing, which occurred despite a slight retreat of the dollar. It is the tenth consecutive month that the benchmark lending rate that the Chinese banks have maintained has remained unchanged.
It is because of the pressure that has been placed on the yuan that this decision has been made, which restricts the ability of policymakers to implement additional easing measures.
Domestic issues are another factor that contributes to the decline of the yuan. There is still a lack of activity in China's real estate market, and consumer spending is low, both of which contribute to the depreciation pressures on the currency.
In addition, the projection of inflation data for personal consumption expenditures (PCE) in the United States and the decline in yields on U.S. Treasury securities are influencing the dynamics of global currency markets.
Government responses to geopolitical tensions
A further dampening of sentiment toward Chinese financial markets has been brought about by geopolitical tensions and the possibility of trade wars, particularly in light of tariffs imposed by the United States and the European Union on electric vehicles (EV) manufactured in China.
Additionally, the offshore yuan (USDCNH) surpassed 7.28, marking a seven-month high during this time period.
In the first five months of 2024, China's fiscal revenues experienced a decline of 2.8%, which is consistent with the trend that was observed in the previous year. In response, the Chinese government intends to strengthen the economy by increasing the amount of fiscal stimulus it provides.
This will include the sale of special treasury bonds and the provision of incentives for the trade-in of consumer goods.
Market views and projections for the future
A significant amount of capital has been outflowed as a result of the weakening of the yuan. This is because domestic investors have moved their funds to higher-yielding assets overseas, particularly in Hong Kong.
As a result of recent policy announcements and disappointing economic data, the level of interest among foreign investors in Chinese stocks has remained relatively constant.
In the future, it is anticipated that the People's Bank of China (PBOC) will continue to exercise careful management of the value of the yuan, striking a balance between the need for stability and the pressures of a currency that may be depreciating.
It is possible that the upcoming plenum of the Communist Party of China, which will take place in July, will provide additional clarity on the policy direction of the government, which will have a significant impact on the yuan and the overall economic strategy.
The technical analysis of the Chinese yuan in comparison to the US dollar reveals a bearish trend. Moving averages are sending out extremely strong sell signals, and oscillators are maintaining a neutral stance.
While the neutral oscillators indicate a lack of immediate momentum, the moving averages suggest that the yuan is on a long-term downward trajectory. This suggests that the market is waiting for additional cues to determine the next course of action.
Furthermore, the general sentiment of the market is that a sell recommendation is the best course of action, which suggests that the yuan may continue to be subjected to downward pressure in comparison to the dollar.
It is important for traders and investors to keep an eye on forthcoming economic data and geopolitical events that have the potential to affect the direction that this currency pair will take in the near future.
In conclusion, the current position of the yuan, which is near the weaker boundary of its trading band against the dollar, brings to light the underlying economic vulnerabilities as well as the complex interplay of domestic and international factors.
Given these challenges, the actions taken by the PBOC in the coming months will be extremely important in determining the trajectory of the Chinese currency.