Key points:
The Chinese renminbi is expected to be managed lower by the Chinese authorities as they attempt to counterbalance the strength of the US dollar.
In recent months, the US dollar has been seeing a strong upward momentum, and the People’s Bank of China (PBOC) will likely allow the USDCNH currency pair to return to levels seen in October 2023, surpassing 7.30.
With the strength of the US dollar outpacing other currencies, the PBOC aims to mitigate this. Despite a sluggish domestic economy and the easing policies by the central bank, the Chinese renminbi has strengthened in trade-weighted terms.
This paradox arises because the managed-floating currency has depreciated slower than its counterparts against the US dollar.
Concurrently, the PBOC has worked to stifle volatility in the Chinese renminbi, engineering a gradual and controlled uptrend in the USDCNH central parity rate.
Picture: USDCNH on a controlled uptrend as observed on the VT Markets app.
Current and future trends of the Chinese renminbi
The USDCNH central parity rate fixing recently hit a year-to-date high of 7.1196, indicating a managed band within which the exchange rate can fluctuate.
While the pair sits within a band in which the exchange rate can fluctuate, with the US election approaching and market uncertainties increasing, a break above the September 2023 high of 7.3439 is a real possibility.
Conversely, a downturn in the US dollar would be beneficial for the PBOC, allowing them to hold or slightly lower the exchange rate while still managing a decline in the trade-weighted Chinese renminbi.
The trend of USDCNH suggests continued controlled depreciation. With a strong US dollar and managed volatility, the PBOC is likely to keep the USDCNY in the low 7.30s, ensuring stability in trade-weighted terms and responding to global currency trends presenting scalping opportunities in the short term.
Official partners:
