Jun 28, 2023

Federal Reserve Chair Jerome Powell will speak on Wednesday with the Chinese Yuan near its 2022 lows against the US dollar.

USDCNH Weekly Chart

USDCNH Weekly Chart

USDCNH trades at 7.21, with highs around the 7.35 level. The current level shows some resistance from a late-2022 bounce.

The US dollar continues to show strength against the Chinese yuan with continued rate hikes from the US and stimulus in the Chinese economy. A recent cut in lending rates from the PBOC has added to the USD’s strength.

The dollar has been supported as the Chinese economy did not rebound as strongly as expected from its reopening. Another headwind has been tensions between the two countries, which have slowed investment in Chinese financial markets.

The central bank tried to support China’s currency on Tuesday by setting the daily reference rate much higher than expected. That came a day after a prominent finance writer and his colleagues were suspended from a social media platform for sharing “negative and harmful information” about Chinese stocks.

The government has not stepped up with stronger stimulus despite some clouds over the economy, with the yuan now at a seven-month low. The MSCI’s index of Chinese equities is almost 20% below the highs seen in January.

Despite the weakness, the Federal Reserve is likely nearing the end of its interest rate hike cycle, despite hawkish comments to the contrary. That could boost flows to the Chinese stock market and the yuan.

The PBOC used its “fixing” strategy to set rates 111 pips stronger than estimates, the largest premium since November. There are other tools available, such as cutting the reserve requirement ratio for foreign-currency deposits while increasing costs to short the yuan. Pressure on the yuan is expected to ease with improvements in the economy, according to the state newspaper China Securities Journal.

There are fears among analysts that the government will shy away from stronger stimulus, and that is hurting stocks. The MSCI China index dropped 7% over six days before a 2% bounce on Tuesday.

On Monday, Wu Xiaobo and two other writers were banned from Weibo after claims they had “attacked and undermined” Chinese monetary policy and hurt the stock market. Wu had 4.7 million followers on the social media platform. Recent posts have also been deleted.

The Chinese yuan is currently nearing its 2022 lows and could be in for a revival with a more dovish Fed and the government’s increased efforts to defend its currency.

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