The USD/CNY relentless sell-off accelerated today as the Chinese yuan soared against the US dollar. The pair dropped to 6.400, which is the highest it has been in more than three years. It has fallen by more than 10% from its highest level last year.
Chinese yuan gains against the US dollar
The Chinese yuan has been in a relentless gain against the US dollar as demand for the country’s products has risen. After contracting in the first quarter of 2020, the Chinese economy staged a major recovery in the second quarter. In total, the country was the first major economy to grow in 2020.
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This growth was mostly because the country was not affected significantly by the coronavirus pandemic. The country of more than 1.3 billion people recorded less than 5,000 deaths, which is remarkable.
At the same time, as more countries locked down, the country benefited from rising demand. In fact, its manufacturing sector has done substantially well. This is evidenced by the surging amount of exports and trade surplus. All this has helped the Chinese yuan regain its strength.
Meanwhile, the People’s Bank of China (PBoC) has relatively refrained during the pandemic. Unlike in the past, the bank has not taken measures to weaken the currency. In the past, the bank was known to manipulate the currency to boost its exporters.
The USD/CNY pair has also weakened because of the actions by the Federal Reserve. In its response to the pandemic, the Federal Reserve decided to unleash its biggest expansionary policy on record. It lowered its interest rates to zero and launched a major quantitative easing plan. It has added its balance sheet to more than $7.9 trillion.
Further, even as inflation has risen and labour market tightened, the bank has insisted that it will maintain the expansionary policies. This has seen the greenback weaken against most currencies.
USD/CNY technical forecast
The daily chart shows that the USD/CNY pair has been under intense pressure. Today, it managed to crossover below the previous YTD low at 6.4200. It has also moved below the 25-day and 50-day exponential moving averages while the Relative Strength Index (RSI) has moved to the oversold level of 29. It is also above the Ichimoku cloud. Therefore, the pair may keep falling as bears target the next key support at 6.300.
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