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USD/CNH forecast 10.09.2020

September 10, 2020

September 10, 2020

USD/CNH forecast: five reasons to buy yuanDmitri Demidenko

Fundamental yuan forecast for today

Unless the US-China trade war is resumed, the USD/CNH bears will be

strong

While the ECB is trying to set the euro bulls back, the People’s Bank of China seems to be satisfied with almost a 5% strengthening of the yuan versus the US dollar. According to DBS Bank and Mizuho Bank, Beijing benefits from the strong currency. It reduces import prices and supports consumer spending. What about exports and inflation? These indicators could yet wait. Lower commodity prices compared to last year smoothen the negative impact of the [USD/CNH][1] drop on the exporters. The CPI has been for the fourth consecutive close to the level of 2.5%, which is quite acceptable for the PBoC.

The main growth drivers for the yuan against the US dollar are the de- escalation of the US-China trade war and the divergence in the economic growth and monetary policies. Due the to timely measures taken against the spread of COVID-19 in the country, China’s GDP can rise by 2.5%-3.5% this year. The US GDP, however, is likely to drop by 5%-6%. The Chinese central bank has lowered the interest rates by 40 basis points since early 2020, the Fed- by 150 basis points. In addition to the US huge QE size, this fact is likely to weigh on the dollar.

Dynamics of GDP in USA and China

![LiteForex: USD/CNH forecast 10.09.2020][2]

Source : Bloomberg

The resumption of the US-China trade war could set the [USD/CNH][1] bears back. Donald Trump accuses China of COVID-19 origin, suggesting the two economies could decouple. According to Bloomberg, in case of a new round of the trade war, China’s GDP will drop from 4.5% to 3.5% by the end of 2030, in the USA, the GDP will drop from 1.6% to 1.4% in the same period. China depends on the US technology, it will lose more. However, the economies won’t be necessarily decoupled. First, despite Trump’s threats to impose taxes on US companies that manufacture products in China, only 4% of them plan to return production to the USA, according to a survey by the American Chamber of Commerce in Shanghai. More than 70% of them are not going to do it. Second, Trump hasn’t yet been reelected.

So, the strong yuan supports Chinese imports and consumer spending. Also, it supports the global policies for the “de-dollarization” of the economy. The Chinese banks usually hold safe havens, if their price going down, the banks will buy the local currency. The [USD/CNH][1] decline lets China more easily increase the purchases of the US goods according to the phase -one trade deal with the USA. The strong Chinese currency also lowers the risk of Donald Trump’s attacks, as the US president used to accuse China of the FX manipulations.

So, Beijing wants a stronger yuan, Washington – a weaker dollar. The USD/CNH bears also benefit from the divergence in the economic growth and the monetary policies of the Fed and the PBoC. Why shouldn’t the pair continue falling? I think the [USD/CNH][1] can well drop to 6.7. Investors should monitor the US presidential election. If Joe Biden’s approval ratings increase, one could safely buy the yuan against the dollar. Biden is thought to put less pressure on China than Trump did.

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Price chart of USDCNH in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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