The Chinese Yuan is at a 14-year low against the US Dollar, at levels last seen in 2008. The USD/CNY has weakened against the unstoppable Dollar.
The Fed’s aggressive rate hike strengthened the US Dollar and weakened the Chinese Yuan. The near-zero growth rate in China comes after the construction sector fell.
The USD/CNY currency exchange rate is 7.1160 on Friday, October 7, 2022. It has depreciated 11% this year. The Yuan below 7 per USD is of concern to the Chinese authorities.
Fed’s Aggressive Tightening Policy Weakens Yuan
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Aggressive tightening policy by the Fed has led to the weakness in the Chinese Yuan. The Fed tightened policy rates to curb high inflation in the country.
The Chinese Yuan was 6.30 in March 2022 against the Dollar and touched 7.2517 in the last week of September 2022, a decline of 15% in seven months.
The Yuan is at a 14-year low against the Dollar, at the 2008 lows. The US Dollar is at a 20-year high, which has weakened the global currencies, including the Chinese Yuan.
Chinese Growth at Near-Zero
The Chinese economy shows GDP growth at near zero for the second quarter. The construction sector slumped after the Covid pandemic. The property market plunged after real estate activity fell and negative sentiment hit the housing sector. Home buyers are not repaying mortgage payments and this has caused havoc on the housing market. Consumer confidence has come down with the overall economic situation falling lower.
Western countries raised sanctions against Russia after the war. Imports in Russia have become expensive. Consumers have to pay more for imports. Students studying abroad have to pay more for their education. Tourism has become expensive as travel to other countries from China has become expensive. Capital outflow from China is increasing.
China is the second-biggest economy and has trade relations with other countries like Australia, New Zealand, Japan, and other western countries. The weakening currency is good for exports from China. However, imports have become costly, lowering consumer confidence in China.
Yuan Gaining Importance on Moscow Exchange
The Chinese Yuan gained importance on the Moscow Exchange in 2022. It is one of the most traded currencies in Russia. After the Russia-Ukraine conflict, Russia has been trying to destabilize the US currency.
Around 65,000 transactions have been made between the Russian Ruble and the Chinese Yuan. Almost 20,000 transactions took place between the Ruble and the Dollar on Monday. Trade between China and Russia is improving in recent years. The growth momentum in trade between China and Russia is high, says the Chinese Commerce spokesperson, Shu Jueteng.
According to data, SWIFT transactions in Yuan have gained the fifth position, and it is the most active currency transacted. The IMF reports that the Chinese Yuan ranks fifth as a global foreign currency reserve. Trade using the Chinese Yuan is increasing in the international market.
The Chinese Yuan is gaining popularity with the US Dollar volatility.
PBOC Intervention on Yuan
To protect the Chinese Yuan, authorities have asked state-owned banks to sell US Dollars and purchase Yuan. Despite intervention from the People’s Bank of China, the Yuan continues to weaken. The PBOC is taking steps to protect the currency reserve.
The PBOC manages its currency under the floating rate policy, maneuvering the rates whenever necessary.
Major Currency Pairs Forecast
British Pound Sterling at 1.10 Levels
British authorities have plans to revise its income tax top rate. The GBP/USD currency pair found resistance at the 1.15 level but could not rise further and started to decline. Cost of living has increased, pulling the Pound to an all-time low, forcing authorities to change plans on tax cuts.
The GBP/USD closed at 1.1084 last week and may continue to decline if it falls below 1.0850 levels.
Euro to Dollar Below 0.98 Levels
The Euro to Dollar currency pair weakened with the energy crisis caused by the Russian war on Ukraine. The EUR/USD currency pair slid to 0.9550 in September but rebounded to 0.995 levels in October. If the Euro continues to decline, it may slide below the support at 0.96 levels. If the EUR/USD takes support, it may rise to 0.9990 levels again. The EUR/USD currency pair in the forex market closed at 0.9741 last week.
Japanese Yen
The Japanese Yen fell to 145.33 last week, and authorities have plans to halt the USD/YEN downslide. The Yen is at levels last seen in 1998.
US Dollar Index
The US Federal Reserve is on a strict monetary tightening policy by hiking interest rates. The Fed took an aggressive policy course to curb rising price pressure. The global growth outlook has weakened, leading to risk aversion in the forex market. Global currencies have weakened against the US Dollar as a high inflation report in the US drives the greenback higher. The US Dollar has appreciated against major currencies.
The better-than-expected job data in the US has strengthened the Dollar while weakening the Chinese Yuan.
