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Yuan is Not Done Being Battered by the US Dollar

Yuan is Not Done Being Battered by the US Dollar

David Cottle, Analyst

Talking Points:

  • It has been a miserable year for the Chinese Yuan
  • Against the US Dollar, it is headed for losses of more than 7%
  • The picture is rosier against other countries’ currencies, but those are just a sideshow

2016 hasn’t been a great year for the Chinese Yuan.

It started the year at the epicenter of an unexpected global storm, as ever lower “fixings” by the Peoples’ Bank of China of their currency against the US Dollar spurred capital outflows and the first in a series of global doubts about the real strength of China’s economy.

Now as the year bows out the Yuan is arguably the worst performing Asian currency “major.” It is down 7% against a US Dollar since January. Admittedly, the greenback has been carrying all before it globally in the wake of Donald Trump’s shock election win and the Federal Reserve’s almost equally shocking zeal to raise US interest rates. But the Yuan is a particular casualty, languishing at 8.5 year lows. USD/CNY has strengthened in eight months of 2016, and in four of the past five.

A one-way street? USD/CNY this year

Yuan is Not Done Being Battered by the US Dollar

Chart compiled using TradingView

The prognosis for the Yuan against the Dollar is not exactly rosy as we go into 2017 either. Most analysts’ reports suggest that the psychologically important “7” level in USD/CNY will be reached shortly. Indeed the PBOC was obliged to deny reports that that point had actually been reached in Thursday’s trade.

There is better news for the Chinese currency against a basket of China’s trading partners. The Yuan rose to a four-month high against this group on December 20. Unsurprisingly, the Chinese authorities vastly prefer this measure of their currency’s vigour. Indeed, they have just expanded the number of currencies in the “trade weighted” basket.

Starting on January 1, there will be 24 currencies in the China Foreign Exchange Trade System (CFETS), up from 13 now. Among the new entries will be South Korea’s Won, the Mexican Peso and South Africa’s Rand.

However, for all the PBOC’s tinkering this looks likely to be a sideshow compared to the currency markets’ real heavyweight contest: USD/CNY.

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--- Written by David Cottle, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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