Do China Want Strong Yuan?

On the chart, USD/CNH has turned up from the 7.1285 low to consolidate sharp losses from the November high. Consolidation around the 7.1500 level tracing out a bear flag and see risk for break of the 7.1285 low to further extend losses from the Sep high to retrace gains from the January low. Break will see room to the 7.1160 support then the 7.1000 congestion.

This deems to be what the PBoC want to see after fixing the reference rate for onshore Yuan to be significantly stronger than estimate in the past weeks to artificially stall the fall in Yuan. But we doubt the continual strength in Yuan is what the Chinese government want to see. We believe the Chinese government would prefer a steady but soft Yuan to minimize the risk derived from FX volatility and supports Chinese export.

The strong fixing from PBoC is aiming to slow down the slump in Yuan rather than prompting it up. USD/CHN has been rallying strongly since May 2023 as U.S. Treasury Yields rallying acorss the curve after initial correction. The key lies in monetary policy where the Fed tightens to combat inflation and PBoC is occassionaly cutting to stimulate the economy. The fundamental imbalance has led to the one way traffic in USD/Yuan. The recent turn in the pair was led by the Fed signaling potentail peak rates and saw both the U.S. Treasury Yields and USD rotate lower. With the PBoC continue to fix the onshore Yuan reference rate to be much stronger than estimate, one may suggest the PBoC will seize the advantage and continue to reinforce the Yuan yet we doubt such would be the case.

The Chinese Trade number has been choppy with the latest data in October showing export contract by 6.4% y/y and import returning to positive territory at 3% y/y. The number slightly improved from September as import rebounds, showing domestic demand is slowly recovering. With the current take in policy, it is not hard to tell China is trying to accerlerate economic recovery and they certainly do not want a very strong Yuan, which would deteriorate the attractiveness of Chinese goods, neither a very weak Yuan. A steady and soft Yuan would put the Chinese authoirty in a conforatable spot for now.