Yuan sits at key support after strong China PMI data

The USD/CNY pair declined to a key support level on Tuesday after the strong Chinese economic data. The Chinese yuan is trading at 6.37 against the US dollar. It has risen by more than 11% from its lowest level in 2021.

China manufacturing data

The Chinese yuan has been in a steady bullish trend in the past few months. The rally continued on Tuesday after Caixin published the latest manufacturing PMI numbers.

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According to the company, manufacturing activity in China increased from 49.9 in November to 50.9 in December. That figure was better than the median estimate of 50.0. A PMI figure of 50.0 is usually a sign that a sector recorded an expansion.

These numbers show that the Chinese economy is still strong even after the ongoing Covid-19 pandemic. Recently, some provinces ordered lockdowns in a bid to slow the spread of the illness. 

The biggest catalyst for the sector is international demand from countries like the United States and the UK. For example, data published last week showed that US imports surged in November, pushing the trade deficit to a record high. Most of these imports were from China.

USD/CNY outlook

The USD/CNY has been in a strong trend for months, prompting the Peoples Bank of China (PBOC) to intervene. In December, the central bank attempted to slow the yuan strength by setting its fixing rate at a lower level relative to estimates. It also told banks to hold more foreign currency reserves in a bid to reduce US dollar supply.

A strong Chinese yuan tends to hurt US companies, most of which sell their products abroad. It makes their goods more expensive than those from other countries. 

While the PBOC used to intervene more often, the bank has been relatively cautious in the past few months in a bid to make the yuan more market-driven.