Yuan price forecast October 8 2020

2020-10-08

Yuan is the Forex leader. Forecast 08.10.2020Dmitri Demidenko

Yuan buyers can be discouraged by only Donald Trump. If Trump wins the election on November 3, he will likely resume the US-China trade war. In the meanwhile, the renminbi doesn’t have flaws. Let us discuss the yuan prospects and make up a [USDCNH][1] trading plan.

Monthly yuan fundamental forecast

The more eccentric is Donald Trump’s behavior, the stronger are the [USDCNH][1] bears. The US protectionism created a lot of problems for the yuan in 2018-2019. However, the trade deal between Washington and Beijing has solved some of the troubles. Beijing has efficiently managed the pandemic, China’s economy is expanding and the assets attract investors. That is why the renminbi and the associated currencies have become Forex leaders. The 13% rally of the Aussie and the 11% rally of the Kiwi over the past six months are natural, as China accounts for 40% and 27% in the Australian and New Zealand exports accordingly.

The FX rates are determined by capital flows, and the money goes to a more favorable place. The US economy is in recession, the epidemiological situation is difficult, and the political risks are rising ahead of the US presidential election. So, investors look for alternatives to US assets. So, the capital flow in Asia. Because of the rapid localization of COVID-19, the People’s Bank Of China did not need to drastically ease monetary policy, as the Fed did. Beijing was more focused on fiscal stimulus, and this strategy widened the yield gap between 10-year China and US bonds to 190 bp. Over the past twelve months, including August, the net capital flows into China’s bond market to ¥ 615 billion ($ 90 billion), to the equity market - ¥ 93 billion. The overseas investors’ holdings of China’s bonds increased to ¥2.8 trillion, the equity holdings were up to ¥1 trillion.

Dynamics of foreign holdings of Chinese assets

Source : Financial Times

The POBC encourages investors to buy local securities promising to continue to simplify the process of acquiring Chinese assets by foreign investors. The Chinese central bank also expects other central banks to use the yuan as the reserve asset. Beijing must have abandoned its former tactics when it stimulated exports by weakening the local currency. It seems reasonable under the current conditions. It doesn’t make sense to bet on the foreign demand amid the pandemic rampaging in most countries. It is better to encourage domestic consumers also supporting the renminbi growth and increasing imports. Yes, the foreign trade surplus will be shrinking, but China has the resources to compensate for this factor, it is the foreign demand for Chinese assets.

If Donald Trump wins the election, the [USDCNH][1] will be corrected down amid the risk of the US-China trade war escalation. As long as Joe Biden’s ratings grow, the yuan will continue strengthening.

Dynamics of ratings of Joe Biden and Donald Trump

Source : Financial Times

Monthly [USDCNH][1] trading plan

I believe the renminbi is an obvious leader in Forex. It is supported by the divergence in economic expansion and monetary policy. The political environment in China is more favorable than in the US. Furthermore, capitals flow into China’s markets. The [USDCNH][1] has been 6.8% down from May’s high, it is likely to continue falling down. I recommend selling the pair with the pairs with targets at 6.65 and 6.5.

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Price chart of USDCNH in real time mode

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