Yuan price forecast for September 24 2020

2020-09-24

Yuan is strengthening. Forecast for 24.09.2020Dmitri Demidenko

Taking into account the sizes of the US and China’s economies, it is surprising that the renminbi plays a second role in Forex. I will analyze how the pandemic influences the yuan demand and offer a [USDCNH][1] trading plan.

Monthly fundamental forecast for yuan

Divergence in economic expansion is one of the key drivers for the Forex rates. It is like a car race. The GDP rate can be compared to car speed. If a country’s GDP is growing faster than that of the major competitors, the local currency is appreciating. However, the current recession has a unique feature. Unlike most global economies, China is going ahead. Other countries are trying to go back to the starting point after moving in the opposite direction. Is the winner identified?

Effective management in the fight against the pandemic is to help China get ahead of the US economy much earlier than anticipated. Bloomberg expects Chinese GDP to expand by 2% in 2020, OECD – by 1.8%. The US GDP is going to contract. The sizes of the two largest world’s economies are already comparable, so, it is strange that the renminbi plays a second role in Forex. According to the Bank for International Settlements, the greenback’s share in the Forex conversion operations was 88% in 2019, the renminbi accounts for 4.3%. The yen’s share was 17%, and the pound’s share was 13%. However, the Chinese economy is almost three times bigger than the Japanese and it exceeds the UK economy by five times.

In 2020 the situation is different because of the pandemic. The HSBC notes that yuan is now more important in the foreign exchange rates of the G10 currencies. It is evident from both the rising correlation and more active than previously Asian Forex trading.

Correlation between yuan and G10 currencies

Source : Bloomberg.

The [USDCNH][1] downtrend is supported by the growing demand for the renminbi and the expansion of the Chinese GDP. The Fed uses a huge monetary stimulus, and the PBOC doesn’t use any. Therefore, the gap between the yields on the US and China’s government bonds is widening to all-time highs. FTSE Russell intends to include Chinese securities in the calculation of its own indices. Beijing has issued debt obligations worth 9.62 trillion yuan since the beginning of the year, and the total volume of planned sales in 2020 significantly exceeds the indicators of 2019. The capital inflow in the largest Asian economy will support the [USDCNH][1] downtrend in the future.

Yields on government bonds of the US and China

Source : Trading Economics

The growing demand of the overseas investors for the Chinese assets could lead to bubbles in stock and real estate markets, which is a cause for PBoC concern. I do not think that the regulator’s attempts to put a barrier on the way of the RMB strengthening using a lower-than-expected fixing suggests the negative impact of the strong currency on foreign trade. In August, China’s exports increased by 9.5%. According to Capital Economics, China’s current account surplus in 2020 will reach 3% of GDP, the highest level in a decade.

Monthly [USDCNH][1] trading plan

I believe, the People’s Bank of China aims at smoothening the yuan growth rather than setting it back. The [USDCNH][1] correction up is a good chance to sell the pair. I recommend adding up to the [shorts entered earlier][2] with a target of at least 6.7.

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Price chart of USDCNH in real time mode

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