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Dollar vs. Chinese Yuan analysis (USD/CNY)

Dollar vs. Chinese Yuan analysis (USD/CNY)

The US dollar (USD) has embarked on a remarkable journey in 2023, surging against the beleaguered Chinese yuan (CNY). 

The yuan, grappling with a plethora of formidable challenges, from the near collapse of its property market to China’s decelerating gross domestic product (GDP) growth, found itself under substantial pressure. 

This vulnerability, compounded by the Federal Reserve’s aggressive interest rate hikes, paved the way for a substantial rally of the greenback against CNY.

At the time of publication on September 25, the USD/CNY pair was sitting at 7.31, close to its 2023 high of 7.34. Year-to-date, the USD gained nearly 6% versus the yuan.

USD/CNY year-to-date chart. Source: TradingView

What’s the latest on USD/CNY?

The dollar’s latest upswing against its Chinese counterpart comes as traders digested last week’s series of global central bank interest rate decisions. 

While the US Federal Reserve skipped a rate hike at its September meeting, the bank signaled it could raise rates at least one more time this year as inflation remains notably higher than the 2% target.

The hawkish comments boosted the greenback, with the dollar index – which tracks the USD’s performance against a basket of six major currencies – trading at 105.6, close to its 6-month high. 

The dollar’s strength in global markets, coupled with mounting seasonal demand for the US currency ahead of China’s national day holiday, weighed on the CNY further on Monday, September 25.

Earlier this month, the CNY plummeted to a 16-year low against the USD, as the People’s Bank of China announced it would continue to prop up the battered currency amid its extended slump. 

Meanwhile, Bloomberg’s commodity expert Mike McGlone, noted last week that the dollar has been gaining momentum from higher US treasury rates, which are “pulling money flows away from risk assets.” 

Notably, a stronger greenback is forcing China and other countries to prop up their currencies and sell Treasuries, acting as a catalyst for US rates and the dollar. 

USD/CNY economists’ predictions

With its year-to-date decline of more than 5%, CNY is evidently one of the worst-performing currencies in Asia against the dollar. 

Economists at TD Securities offered their forecast for the USD/CNY last week, saying they expect the pair to remain in the “7.10-7.35 range for the rest of the year, primarily because the USD is likely to enter a period of choppiness ahead.”

“Data surprises have now turned in favor of China vs. the US, undermining the ‘bad China news is good news for the USD’ narrative while USD exhaustion may have occurred.”

– TD economists said.

However, China’s central bank may be on the lookout for trade-weighted CNY weakness in the short run to support exports, “which should pin USD/CNY at 7.20 by year-end” in spite of the bearish outlook for the dollar, economists added. 

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