Chinese Yuan sinks to nine-month low against US Dollar

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China's Corporate Sector Is A Pandora's Box
China's Corporate Sector Is A Pandora's Box

China's Corporate Sector Is A Pandora's Box

Chinese Yuan (CNY) yesterday nosedived against the US Dollar (USD) to the lowest level since July 07 2013, hence rallying USD/CNY to 6.2034, despite the weak US inflation data. The pair might test the 6.50 milestone in the near future, according to the technical analysis.

Technical Analysis

As of writing, the pair is being traded near 6.19. Short term resistance is being noted around 6.22, the 23.6% fib level and then 6.35 which is the 38.2% fib level as well as the only major resistance before 6.40 i.e. the swing high of the previous wave. The bias for the pair will remain bearish as far as the price is below the 6.40 resistance.

On the downside, support may be noted near 6.11, the low of the previous wave, ahead of 6.00 that is the psychological level and historical support zone for the pair. A break and daily closing below the 6.00 handle could open doors for fresh dips which, however, appears a less likely scenario.

Manufacturing Slowdown in China

Factory output in China fell in February, for the third month in a row, raising serious questions over the first quarter growth because the Asian nation heavily relies on its exports. The Manufacturing Purchasing Managers Index (PMI), released by HSBC Holdings, fell to 50.2 points last month compared with 50.5 in the month before. Generally speaking, a PMI reading above 50 indicates expansion in manufacturing activity and vice versa.

Weaker Growth

China—world’s second largest economy—grew at 7.7% last year which was the slowest pace of growth since 1999. Economists have predicted further decline in the growth to 7.5% by the end of the current year. Besides Chinese Yuan (CNY), manufacturing and growth slowdown in China also affects the prices of commodities. The Asian nation is the biggest consumer of gold, silver and many base metals. The prices of commodities tend to decline on any negative development in China.

US Monetary Policy

The Federal Reserve has reduced the Quantitative Easing (QE) by $20 billion to $65 billion a month through back to back tapering in December and January. Many analysts believe the US central bank will once again reduce the stimulus today by $10 billion to $55 billion after unexpected rise in the nonfarm payrolls during February. Moreover, the minutes from the Federal Open Market Committee (FOMC) January meeting showed that the policymakers were considering complete exit from the QE program as soon as October this year through continuous tapering on every monetary policy meeting. It is pertinent that QE was the major reason behind the weakness in the greenback. Once the Fed scraps the QE, the dollar could hit fresh multi-year highs.

Conclusion

On the macro-economic front, the Chinese economy is losing ground amid falling exports and manufacturing activity while the US economy is recovering rapidly from the 2008 recession. So in the bigger picture, if USD/CNY hits the 6.50 milestone then it will be very much in line with the fundamentals.

To contact the writer of this story: Usman Ahmed at usman@forexminute.com