The USD/CNY exchange rate has been in a slow bullish trend in the past few months and is now hovering at its highest level since November last year. The yuan has crashed by over 2% from its highest point in December.

There are a few reasons why the Chinese yuan is in a downtrend. First, the Chinese economy is showing signs of slowing down. Data released on Friday showed that the country’s manufacturing PMI slumped from 50.4 in April to 49.5 in May. This decline was worse than the expected 50.5. The non-manufacturing PMI also dropped slightly from 51.2 to 51.1, missing the estimated 51.5. 

There are other signs that the economy is making a slow comeback. For one, Beijing has launched a massive project to save the real estate sector. The central bank has reduced mortgage rates while the government is planning to acquire homes built and not delivered to customers.

Also, industrial metals like copper and iron ore have all jumped sharply, indicating demand is rising. China is the biggest buyer of these metals, making them good barometers of the economy. 

At the same time, the IMF has boosted China’s GDP estimates for the year. The agency expects that the economy will expand by 5.0% even as it questioned its industrial policy. 

Second, the USD/CNY pair has soared because of the strong US dollar. The dollar index has soared to over $105 and is sitting near its highest point this year as investors assessed the next Federal Reserve actions. 

Economists have started to question whether the Fed will start cutting interest rates this year as inflation has remained above the 2% target for a while. This explains why the US bond yields have risen sharply recently.

Third, the yuan has dropped as the market reacts to the actions of Chinese policymakers. The People’s Bank of China (PBoC) has maintained a stronger yuan polic this year, keeping its daily fixing rate between 7.09 and 7.11. There are signs that the state owned banks have stepped in to support the yuan by acquiring the US dollar. As a result, analysts question how long this trend will continue.

USD/CNY chart by TradingView

Conducting a technical analysis on the USD/CNY pair is not always easy because of the daily fixing mechanism.

On the daily chart above, the pair has remained above the 23.6% Fibonacci Retracement level and the 50-day Exponential Moving Average (EMA). It has also moved slightly above the Ichimoku cloud indicator. Therefore, I suspect that the pair will continue rising in the coming weeks, especially if the US publishes strong PCE numbers on Friday. It could soar to about 7.30 soon.

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