Forex Analysis & Reviews: 02.06.2022 - Is the yuan a donor for USD...

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InstaForex Loprais Team - Official participant of the Dakar rally

02.06.2022 11:41 PM

Is the yuan a donor for USD or an equal partner?

Many market participants are concerned about the question: is the Chinese currency a kind of donor for the US one? Experts doubt the ability of the yuan to compete with the dollar in the global financial arena, since the Chinese authorities are interested in a moderately weak national currency.

According to Citigroup's currency strategists, the offshore exchange rate of the Chinese currency is expected to fall in the coming months. The reasons are the deterioration of the current trade balance, a decrease in capital inflows and a significant strengthening of the USD. According to the bank's analysts, these factors fit into the economic strategy of the Chinese authorities. China's reaction to the weakening of the yuan implies "a certain tactical agreement to devalue its own currency," Citigroup emphasizes. According to analysts, this is necessary to support the export sector of China.

Citigroup economists expect a gradual weakening of the yuan in the short term. However, in 2023, the pace of this weakening will gain momentum again. Such a scenario is possible if China opens its borders and actively interacts with foreign trading partners. At the same time, the authorities are not making much effort to weaken the national currency. The tactics of the Chinese government are mainly wait-and-see, based on the refusal to interfere in the dynamics of the yuan. Against this background, the Chinese authorities admit the influence of market forces aimed at reducing the yuan exchange rate.

The strengthening of the US currency contributes to the potential weakening of the Chinese currency. Many experts believe that the yuan, along with other currencies, is a kind of "donor" for the greenback. The dollar receives a powerful boost when leading currencies weaken, increasing its stability due to other factors, such as an increase in the yield of treasury state bonds and the expectation of an early interest rate rise. However, the strengthening of the greenback may provoke a crisis in developing countries, analysts warn. Recall that the strengthening of the USD against the yuan and emerging markets currencies began in April of this year.

According to the assessment of the international agency Fitch Ratings, China's sovereign rating remains at the "A+" level while maintaining the "stable" forecast. At the same time, the agency pays attention to the growing downside risks for the Chinese economy. It is expected that at the end of 2022, the world's second largest economy will grow by 4.3%, according to Fitch Ratings. Note that after such a release, the USD/CNY pair traded in the range of 6.6975-6.6976, adding 0.18% on positive news.

However, positive forecasts do not prevent China from competing with the United States in most key areas. Currently, rivalry in global trade is intensifying between them. At the same time, the economic cooperation between America and China remains at a high level. Last year, disagreements did not prevent the mutual trade turnover of both states from increasing by a third. In 2022, the trade balance of the United States and China is still in deficit, although in 2021 their trade surplus exceeded 20%.

According to analysts, mutual trade relations between America and China will develop in a positive way. Despite the existing differences, the US managed to reach a compromise on a number of positions. If such a scenario is implemented, the yuan will have a second wind, experts believe. In such an environment, it is easier for the Chinese currency to compete with the US one, although the latter has the advantage.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.