China’s slowdown weakens the yuan

The Chinese economy is experiencing a sharp slowdown, raising a reasonable doubt that GDP will be able to grow by the initially planned 5.5% this year. Fresh data showed that China’s economy was only 0.4% higher in the second quarter than a year earlier. The half-year increase is 2.5% compared to the same period a year earlier.

A new round of problems for property developers and an increasing boycott by mortgage borrowers to pay their debts is becoming a bigger problem. Government intervention with massive infrastructure stimulus, for example, through nationalising troubled properties, looks logical.

The flip side of the stimulus is an increase in the money supply and a weaker exchange rate. Technically, we have been seeing pressure on the Chinese renminbi against the dollar since the end of last week, and an analysis of the fundamentals suggests that this downward momentum has just begun.

This is not the first time China had had to deflect against the wind by tightening policy when the world economies softened in 2020-2021. The developed countries are quickly taking money off the table, and China is again trying to offset the external downturn with domestic consumption. And this is bad news for the Chinese renminbi.

The technical analysis indicates the almost three-month period of consolidation of the yuan against the dollar after the growth impulse in April is over. During May, the USDCNH corrected its surge from the year’s lows in February, stopping it at the classic 61.8% Fibonacci level. A bullish scenario for UDSCNH implies a rise to the 7.13-7.15 area, this is near the highs of 2019 and 2020 and at 161.8% of the rally in the first months of the year.

The FxPro Analyst Team