Is the yuan a buy or sell as China economy slows?

The USD/CNY price tilted upwards for the fifth straight day as concerns about the Chinese economy escalated. The pair rose to a high of 6.35, which was substantially higher than the year-to-date low of 6.33. It is still about 0.57% below the highest point this year.

China economy slowing

The Chinese economy has been one of the brightest shining stars during the Covid-19 pandemic. The country’s economy initially dipped in the first quarter of 2020 and has been in an upward trend since then. As a result, it has become the best-performing economy in the world.

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But there are signs that the country’s economy is slowing down as the macro-climate change. Companies are complaining about the rising cost of doing business while product shortage has been around for a while.

Another challenge is that China is facing a new Covid wave that has infected thousands of people. As part of the government’s plan, large cities like Shanghai have been in lockdown, which will affect the overall recovery.

Data published on Thursday and Friday showed that the manufacturing sector has entered a contraction zone. According to Markit, the manufacturing PMI declined from 50.4 in February to 48.1 in March. This report mirrored that of the government’s agency, which showed that manufacturing declined from 50.2 to 49.5. A PMI drop of 50 and below is usually a sign of contraction.

Chinese manufacturers are generally worried about the new wave of Covid and the cost of doing business as commodity prices have remained at elevated levels. 

The next key catalyst for the USD/CNY pair will be the upcoming American jobs numbers scheduled for Friday. Analysts expect these numbers to show that the labor market held steady in March as the economy recovered.

USD/CNY forecast

The daily chart reveals that the USD/CNY pair has been in a steep downward trend in the past few weeks. The sell-off accelerated when the pair tested the upper side of the descending channel pattern. It has also moved to the 25-day and 50-day moving averages.

Therefore, there is a likelihood that the pair will keep falling in the near term as the Chinese yuan gains its strength. If this happens, it will retest the lower side of the descending channel at about 6.20.

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