The Chinese yuan strengthens to a 16-month high on Fed rate cut

September 20, 2024

Key points:

• The Chinese yuan strengthens to 7.06 against the U.S dollar, its strongest level since June 2023.
• The surge is driven by expectations of government stimulus and the recent rate cut by the U.S. Federal Reserve.
• Despite China keeping lending rates steady, markets still anticipate easing from the PBoC.

The Chinese yuan (Symbol: USDCNH) climbed to its strongest level since June 2023, opening at 7.06 per dollar.

Picture: The Chinese yuan showing strength against the U.S dollar, as observed on the VT Markets app.

The USD/CNH pair has seen a downward trend as it reacts to the U.S. Federal Reserve’s recent decision to cut interest rates by 50 basis points. This move has sparked hopes for additional economic stimulus from the Chinese government, supporting the yuan.

On the daily chart, we observe that the price is hovering just above the key 7.0500 level, with the recent low at 7.0386 acting as an important support. The EMA lines (24, 72) show a strong downward trajectory, indicating bearish momentum. The MACD histogram is trending in the negative territory, confirming the ongoing weakness in the USD against the CNH.

A break below the 7.0500 support level could accelerate the downside towards 7.0300. However, if we see a reversal from this level, the 7.1000 region may act as a resistance, especially near the 72-period EMA.

While China opted to leave its benchmark lending rates unchanged in the latest monthly fixing, market participants remain optimistic that further monetary easing could be on the horizon. This expectation has increased demand for the yuan from corporates positioning themselves for a more favourable lending environment. The strengthening of the yuan also reflects the broader impact of global monetary policies and China’s potential for additional stimulus measures in response to sluggish domestic demand.

Related content: Interest rate tug-of-war for central banks

Market outlook and opportunities

In the near term, traders may anticipate further appreciation of the yuan, particularly if China announces additional stimulus measures aimed at propping up its economy.

The anticipation of government easing should maintain strong corporate demand for the yuan, especially among businesses looking to hedge currency risk or benefit from cheaper borrowing conditions.

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