- The USD/CNY price is bouncing back a day after it tumbled by more than 2%.
- China exports soared by 9.9% in September while imports rose by 13.2%.
- The PBOC unveiled plans to allow some short selling of the yuan on Saturday.
The USD/CNY is crawling back after falling by more than 2% yesterday. The pair is reacting to a new directive by the People’s Bank of China (PBOC) and mixed trade numbers. It is trading at 6.7525, which is higher than yesterday’s low of 6.6938.
China trade surplus narrows
China has made strong strides this year. While the economy slumped in the first quarter, it bounced back by 3.2% in the second quarter. Analysts expect that the recovery continued in the third quarter.
There are many reasons for this growth, including the fact that the country handled the Covid-19 pandemic well. The country of more than 1.3 billion people and the origin of the virus has recorded less than 100k cases. In contrast, the US, a highly developed country of more than 320 million people has recorded more than 7 million cases.
The country has also been helped by the ongoing trade activity. According to the Chinese custom office, the country’s exports increased by 9.9% to $239.7 billion in September. That was the fourth straight monthly gain and was boosted by the strong external demand.
Imports rose by 13.2% to $202.7 billion after weakening in the previous two months. As a result, the trade surplus narrowed from more than $58 billion to $37 billion. The data also showed that the country’s biggest trading partner was the ASEAN countries, which accounted for more than $416 billion in the first 8 months of the year.
China central bank moves to curb yuan strength
The USD/CNY has been on a strong downward trend since May, when it reached a high of 7.1775. Indeed, the third quarter was the yuan’s best quarter in more than 12 years.
Yesterday, the People’s Bank of China announced new measures to curb its strength, which usually affects its exporters. In a statement, the central bank said that it would allow some investors to short the currency.
Shorting is the process of borrowing an asset and betting that its price will fall. The bank did this by adjusting the forex risk reserve ratio for forward contracts from 20% to zero. According to CNBC, the goal of this new policy was to stabilise the onshore currency, the renminbi.
The Chinese central bank has been under pressure recently because of the yuan strength. While the bank wants the currency weaker, it also wants it to be relatively stable as it seeks to become a reserve currency.
USD/CNY technical analysis
The weekly chart shows that the USD/CNY has been in a strong downward trend. And yesterday, it dropped to a low of 6.6938, which is the lowest it has been since April 2019. The price was also along the 50% Fibonacci retracement level. It was also along the first support of the standard pivot points. It is now below the 50-day and 25-day exponential moving averages. Therefore, I expect that, in the near-term, the pair will continue falling as bears aim for the second support at 6.4270.