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Forecast for yuan price as of 20 October 2020

2020-10-20

2020-10-20

Central Bank isn’t an obstacle to yuan. Forecast for USDCNH for 20.10.2020Dmitri Demidenko

The PBoC’s first attempt to stop the yuan wasn’t successful, but the market expects it won’t be the last one. Will the bank be able to put a spoke into [USDCNH][1] bears’ plans? Let’s find it out and make a trading plan.

Monthly fundamental forecast for yuan

Almost thirty years have passed since George Soros bet the Bank of England wouldn’t save the pound and thus earned $1 billion. Still, that story continues to excite investors. It is rumoured from time to time at Forex that the SNB won’t be able to counteract the franc’s consolidation. In 2020, the same rumor concerns the Chinese yuan. Whatever the People’s Bank may do to stop [USDCNH][1] bears, it can’t reverse the downtrend. That was proved in October, when the limits of the banks’ purchasing foreign currency for clients through currency forwards were cancelled. The yuan made a step backwards, but recovered soon and continued reaching new heights.

Unable to grow by 5.3% as expected by Bloomberg in Q3, the Chinese GDP was supposed to pour cold water on the yuan’s supporters. Dream on. [USDCNH][1]’s correction was bought out fast, and the pair dropped to its lowest since July 2018. The investors noticed this year’s fastest growth of industrial production (+6.9%) and retail sales (+3.3%) in October and assumed the Chinese economy will feel even better in Q4. The competitors can’t boast the same, though.

Chinese GDP: structure and dynamics

Source: Nordea Markets.

According to the IMF’s forecasts, the Chinese GDP will grow 1.9% in 2020, while its American peer will drop 4.3%. However, the divergence may be even bigger. I doubt that fiscal stimulus will be expanded before the presidential elections. At the same time, the previous package’s exhaustion will be a hindrance to recovery. Add a complicated epidemiological situation in the USA, where 57,000 new cases are registered daily, and a hope for GDP’s active growth in October-December may fade out.

The Fed isn’t going to give up its ultra soft monetary policy. On the contrary, it is ready to provide an extra stimulus if necessary, according to Richard Clarida. The People’s bank of China doesn’t have to do that: even if inflation slowed down to 1.7% in September, the main reason was cheaper alimentary products, which had grown more expensive during the pandemic. Thus, the yuan’s consolidation can be seen as a temporary notion. The PBoC may not like that, as the consolidation slows down CPI and exports, but the bank understands well that process is objective: the divergence between economic growth and monetary policy expanded the US and Chinese bond yield spreads. That brings in money to China’s financial markets.

Monthly trading plan for [USDCNH][1]

Whatever the People’s Bank may do, from tougher yuan fixing to softer capital control, it can’t prevent [USDCNH][1] from going down. Continue exploiting retracements for selling at 6.65 and 6.5. How fast those targets will be realized depends on who wins the US presidential election.

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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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