Why the Yuan is on a Steady Balancing Act

 The Chinese Yuan currency has gained more than 5% YoY against the dollar
 China’s CPI rose by 0.7% and the PPI contracted -0.4%, the slowest in less than a year
 The balancing act of the economy by the PBoC is expected to put the currency on a
neutral position against the dollar
Description
Will the Chinese Yuan replicate the stellar performance against the dollar in 2021? We look at
the inflation trend in China and possible actions by the Chinese Central Bank- The People’s
Bank of China (PBoC).

The Chinese Yuan is gaining the attention of investors as an alternative currency-haven from the
dollar’s volatility. The year 2020 saw the Yuan rise by more than 5% from a low of 0.1453 on
January 14, 2020 to a high of 0.1531 to the dollar on January 1, 2021. The bullish run of the
Yuan is against a backdrop of gains in Asian stocks particularly the Japanese Nikkei. China’s
consumer price index (CPI) and manufacturers’ prices rose slightly into the new year 2021. The
country’s strong economic recovery post-pandemic is a strong support for the currency against
the falling dollar.

Trading View
Rising CPI

The purchasing trends of Chinese consumers and the inflation rate rose to 0.7% on 11th January
2021 from a previous low of -0.6% in FY 2019/2020. The CPI beat analysts’ forecasts that had
settled on 0.4% as the new CPI into the new year. This higher reading indicates a bullish
prediction for the Yuan. Further, the higher CPI shows that China paid higher for imports into
the country indicating increasing spending power.

The overall inflation denoted by the Purchasing Power Index (PPI) into 2021 also contracted to
-0.4% from a forecast of -0.8%. The previous reading of -1.5% showed that the country’s
economy was struggling to recover into the pandemic. Slow contraction of the PPI also shows
the rapid pace of recovery of the Chinese economy. The factory prices have fallen at the slowest
pace in less than a year.

The People’s Bank of China (PBoC) announced that it would enact a supportive monetary policy
for small businesses while watching the economy’s recovery in 2021. The indication of
increasing inflation rate shows that the PBoC is in the process of scaling back on the low-interest
rates offered until the end of 2020. Additionally, the bank will update its borrowing regulations
to scrutinize operations of internet loan platforms such as Ant Group by Alibaba, Tencent
Holdings and Aliplay among others.

Management of borrowing and spending among the Chinese is crucial at this time. The Bank will
want to contract the monetary policy but keep it flexible. It might consider to raise the interest
rates but at the same time stimulate the economy. This balance is important keeping in mind that
some sectors such as real estate and housing in general are yet to recover.
Technical Analysis

Trading View

The 14-day RSI shows a value of 45.951 indicating that the forex is in a neutral position. The
stochastic oscillator shows a buy position at 59.869. Both the 5-day and 10-day SMA/ EMA are
constant at 0.1543 slightly lower than the day’s trading value at 0.1543. The buy position is also
supported by the 200-day SMA at 0.1540 and the EMA at 0.1541. However, a sell position of the
currency is established by the 20-day to 100-day SMA and EMA. The 100-day SMA indicates a
sell position as it stands at 0.1547 while the EMA is 0.1544. The 50-day SMA is 0.1546 while
the EMA is 0.1545. The balance between the two averages shows that the currency pair will
trade at a neutral position in the short term.

The PBoC’s balance of the economic stimulus and interest position may see the Chinese Yuan
remain neutral for some time in the first quarter of 2021.