Yuan price forecast February 3 2021

2021-02-03

Yuan prefers scalpel over sledgehammer. Forecast as of 03.02.2021Dmitri Demidenko

[USDCNH][1] is stuck in the area of 2.5-year lows and is awaiting a hint from the US to determine the direction of further movement. Let us discuss the Forex outlook and make up a trading plan

Fundamental yuan forecast for six months

Markets are like travelers: they can’t move in the same direction for a long time. They need a break from time to time. Forex is no exception. After explosive growth in May-January, the yuan entered a state of consolidation against the US dollar, in which it remains for the fourth week in a row. Even though the [USDCNH][1] bears have many advantages that allow them to count on the continuation of the downtrend, the obstacles created by Washington can foil all their efforts.

Formally, all those drivers that moved the yuan upward in 2020 will continue to operate in 2021. According to the Congressional Budget Office’s forecasts, the US economy will grow by 3.7% this year, while the Chinese by 8.2%. If anyone thinks that the outbreaks of COVID-19 in China will prevent this, I hasten to upset them. Beijing has sufficient experience in containing the pandemic, and leading indicators from Bloomberg show that the Chinese economy continued to grow in January.

China’s economic growth in January

Source: Bloomberg.

The People’s Bank of China may say that there will be no sharp turnaround in monetary policy, it still has more room for rate hikes than the Fed. The PBoC does not risk scaring global financial markets with its actions. At the same time, the explosive growth of the economy and worries about bubbles in the asset markets could provoke a hawkish stance.

Chinese assets still look more attractive than US assets. The liberalization of the economy and the removal of foreign investors’ restrictions contribute to the inflow of capital to Asia and the inclusion of local securities in the global MSCI and FTSE Russell indices. Over the past year, the Shanghai Composite has risen by 26.4%, significantly outperforming the [S&P 500][2] (has risen by +16.4%). China’s 10-year bond yield is 3.2%, compared to 1.1% on treasuries.

Dynamics of Shanghai Composite and [S&P 500][2]

Source: Trading Economics.

Add to this the yuan’s growing appeal as an asset for central banks’ gold and foreign exchange reserves, and it may seem that the [USDCNH][1] bulls are doomed. This is not the case. Traders need to get used to the fact that everything can turn upside down in Forex. The yuan was actively growing in 2020 because its buyers were betting on Joe Biden’s victory in the US presidential election. The Democratic candidate seemed to be the best alternative to Donald Trump, who imposed numerous tariffs on China.

Indeed, the US President’s negotiating position seems to be a kind of surgical intervention compared to the “sledgehammer policy” used by his predecessor. At the same time, Biden noted that he did not intend to cancel tariffs yet, and the Secretary of the Treasury, Janet Yellen, said some unpleasant things about China.

[USDCNH][1] trading plan for six months

In my opinion, the stop of an escalation of the conflict between Washington and Beijing is necessary for the continuation of the [USDCNH][1] decline in the direction of the [previously indicated][3] targets of 6.32 and 6.2. The bulls’ inability to bring the pair out of the upper border of the consolidation range of 6.42-6.51 may be a reason for increasing shorts.

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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