Yuan price forecast November 2 2020

2020-11-02

Central banks will swallow yuan. Forecast as of 02.11.2020Dmitri Demidenko

The USDCNH can well continue falling for several reasons. The renminbi is strengthening amid the economic growth gap and the capital inflow to China. Besides, the world’s central banks tend to buy more yuan. Let us discuss the renminbi outlook and make up a [USDCNH][1] trading plan.

Monthly yuan fundamental forecast

The right time is essential for effective reforms. Beijing’s financial market liberalization resulted in capital outflows and a weakening of the yuan. Some people could believe that the simplification of access for foreign investors to China’s futures market and the abandoning of the counter-cyclical factor in setting the exchange rate of the national currency is a try to stop the [USDCNH][1] fall. They were wrong, however. Yes, similar actions five years ago sent the renminbi down, the current situation is completely different.

In late 2015, the Fed began normalizing monetary policy, which strengthened the US dollar. The money was flowing into the USA, and the burst bubble in the Chinese stock market accelerated the process of the capital outflow from the country. In 2020, the money is going to Asia. Since early 2020, foreign investors bought Chinese government bonds worth ¥370 billion ($55 billion). Over the first half of 2020, China attracted $76 billion of foreign direct investments. The US, for example, attracted $51 billion. On an annual basis, foreign investments in China fell by 4%, but in the USA, it was 61% down, and the global indicator dropped by 50%.

Dynamics of foreign direct investments

Source : Wall Street Journal

The liberalization of financial markets carried out by Beijing aims at the yuan’s internationalization. The yuan is meant to get a higher position in international trade, settlements, and conversion operations. The renminbi accounts for about 2% in the global FX reserves, which is extremely low, considering China’s GDP in the global economy. In growing demand of the world’s regulators for China’s currency is an essential bearish factor for the [USDCNH][1].

But still, the primary growth drivers for the yuan are the divergence in the economic growth and the high appeal of China’s assets, also because of the widening spread between the US and China’s bonds since the beginning of the year. Besides, robust GDP growth is a reason to buy China’s equities. The Chinese manufacturing PMI is above 50, which signals the economic expansion for the eighth consecutive month. The services PMI has reached its seven-year high.

Dynamics of China’s PMI

Source : Bloomberg

Due to the difficult epidemiological situation, the US GDP is likely to slow significantly, and the euro-area economy could face a double recession. China’s economy, however, seems to be stable amid the global crisis. So, it is natural that the yuan is growing.

Monthly [USDCNH][1] trading plan

The [USDCNH][1] sell-offs are going to accelerate if Joe Biden wins the US presidential election. The Democratic candidate should abandon protectionism policies carried out by Trump. In this case, China may not worry about new trade wars. The first and the second target for short positions at 6.7 and 6.65, set in [September][2] and [October][3], have already been reached. The current correction of the [USDCNH][1] will provide a good chance to add up to shorts with a target at 6.5. If Trump wins the election, one should buy the pair in the short-term.

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Price chart of USDCNH in real time mode

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