The Chinese yuan is going through its worst devaluation since 2018 as signs of economic slowdown emerge. The USD/CNY has risen in the past five straight weeks and is currently trading at the highest level since November 2020. It has risen by over 6.35% from its lowest level this year.
Chinese yuan crash
The Chinese yuan has had a strong performance in the past few years as the country’s economy has powered ahead during the pandemic. For example, the USD/CNY price declined from 7.18 in May 2020 to a low of 6.30 earlier this year.
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The strong performance of the Chinese yuan happened at a time when demand for goods from China jumped sharply. Also, the resilience of the economy lured more investors to sell the US dollar to buy Chinese stocks and bonds.
Recently, however, a combination of an aggressive US dollar and signs of a slowdown in China has pushed the yuan in the defensive.
Chinese and American policy officials have taken diverging policies. For example, the Federal Reserve decided to accelerate its monetary policy tightening in its meeting last week. In this, it decided to hike interest rate by 0.50%, the biggest increase since 2000.
Officials also warned that interest rates will continue rising in the coming months at a similar pace. This was notable since, historically, interest rates usually rise by 0.25%. The bank is also considering reducing its balance sheet.
On the other hand, the PBOC has taken measures to provide stimulus in the economy. The bank has maintained interest rates low and signaled that it will maintain this policy for a while. This happened as data pointed to the weakness in the Chinese economy following the Shanghai lockdowns.
USD/CNY forecast
Turning to the weekly chart, we see that the USD/CNY pair formed a falling wedge pattern that is shown in red. In price action analysis, a falling wedge is usually a bullish sign.
Recently, the pair has moved slightly above the important resistance level at 6.5792, which was the highest level on March 29th. It has also moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved above the overbought level.
Therefore, the pair will likely keep rising as bulls target the key resistance at 7.0. A drop below the support at 6.57 will invalidate this view.
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Source: https://invezz.com/news/2022/05/09/usd-cny-forecast-as-the-chinese-yuan-meltdown-continues/