The Chinese yuan had a strong performance in November as the US dollar index (DXY) slipped. The USD/CNY exchange rate dropped to a low of 7.1176, the lowest level since June 16th. It has crashed by over 2.86% from the highest point this year.
DXY retreats, China bottoming
The USD/CNY pair has come under pressure in the past few weeks, helped by the weaker US dollar and signs that the Chinese economy is bottoming.
Economic data published by Caixin showed that the country’s manufacturing PMI rose slightly to 50.7 in November, higher than the median estimate of 49.3. The increase was higher than the previous month’s 49.5.
A PMI figure of 50 and above is a sign that a sector is improving. A separate report by a government agency, however, showed that the manufacturing PMI dropped to 49.4 in November, lower than the median estimate of 49.7. The composite PMI came in at 50.4.
There are signs that the Chinese economy is recovering. For example, the price of iron ore has jumped to the highest point in months. Similarly, other industrial metals like copper and silver have also risen.
Beijing has announced several measures to boost the Chinese economy. The government is focusing on ensuring the completion of stalled and pressuring banks to provide additional financing. They will also push banks to provide unsecured loans to certain developers.
There are several risks to the Chinese yuan. For example, most foreign investors have pulled back their investments in China. Foreign venture capital flows have been weak in the past few years.
The USD/CNY exchange rate also crashed as investors embraced a risk-on sentiment in November as inflation slowed. The most recent data shows that the headline Consumer Price Index (CPI) has dropped to 3.2% and analysts see it dropping further.
Therefore, most economists believe that the Federal Reserve will start cutting interest rates in the coming months. This explains why the US dollar index (DXY) and the CBOE Volatility Index (VIX) have plunged.
USD/CNY technical analysis
The USD to CNY exchange rate has been in a strong downward trend in the past few weeks and has moved to the lowest point since June 16th. The 50-day and 100-day Exponential Moving Averages (EMA) are about to form a bearish crossover. Also, the Relative Strength Index (RSI) has moved to the oversold level.
Therefore, the outlook for the USD/CNY pair is bearish now that it has formed a small bearish flag pattern. If this happens, the next point to watch will be the psychological level at 7.00.
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