Market Overview

13 January 2023

Chinese Yuan Is Gaining Strength Against the Dollar Ahead of Other Currencies

The Chinese Yuan or the Renminbi, as it is otherwise known, is gaining strength against a weakening U.S. Dollar like most of the other world currencies. In this case the Dollar sets the tune as the U.S. Dollar index declined to 102.9 points from 104.9 points at the beginning of January, or by 2%. USD/CNY also dropped by 2% from 6.90 to 6.77 by January 12.

The Greenback is weakening mostly on expectations of mild monetary policy moves by the Federal Reserve (Fed), and generally amid a more optimistic sentiment in the market. One of the reasons for this optimism is that China is gradually removing its harsh COVID restrictions. As the  Chinese economy opens up, both domestic production and sales in world’s leading countries, and also imports in China form these countries, will be boosted. So, expectations about the improvements of the Chinese economy are strengthening its currency, but mostly indirectly via the U.S. Dollar.

Recent 2022 inflation figures showed that prices increased in China to 1.8% year-on-year from 1.6% in November. Inflation in the United States slowed down to 6.5% year-on-year in December from 7.1% a month before. The core Consumer Price Index (CPI) in the United States declined to 5.7% year-on-year compared to 6.0% in November. These figures are in line with forecasts but the slowing down of prices in the U.S. has been affected the Dollar more as investors expect the Fed to decrease the pace as which it is rising interest rates as inflationary pressure eases. This will consequently lower the yields of U.S. Treasuries and the demand for the Greenback.

The U.S. Dollar index fell to 102 points on the news, while the USD/CNY continued to go down to 6.72. The downside trend for the American currency is ongoing, as the next target for USD/CNY is at 6.70-6.72 with the resistance at 6.79-6.81.

The Fed has to make the next move now during its meeting on February 1. According to the Fed Watchtool investors bet that the monetary watchdog will raise its interest rate from 4.5% to 4.75%. However, if the rhetoric of Federal Open Market Committee (FOMC) members would be tighter than expected during the current euphoria in the market, the Dollar may substantially strengthen to 105.5 points for the U.S. Dollar index, and to 6.90 for the USD/CNY.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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