Chinese Yuan Nears Multi-Year Low, Consequences for EURUSD

by Alejandro Zambrano

Posted on October 25, 2018 at 10:34 AM

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The Chinese Yuan is approaching a pivotal point vs. the U.S. Dollar, and a break to the 2016 high of 6.9648 might send the USDCNY higher.

According to IMF figures, the Chinese economy is the world largest economy on a PPP basis, and account for about 15.5% of world GDP. And, when the currency of the world’s biggest economy softens we tend to see other major currencies pairs such as the EURUSD depreciate, as there is a strong negative correlation between EURUSD and USDCNY since 2014.

From a macroeconomic perspective, there are several reasons to anticipate a softer CNY in the months ahead.

First, the world economy is slowing, and Caixin China Manufacturing PMI fell to 50 in September. A decline below 50 suggests a contraction in the Chinese manufacturing sector, and with the latest round of tariffs, I think it is fair to assume the PMI will slip below 50 in the next few months.

Second, I think it is likely that President Trump will go ahead and increase tariffs to 25% post the Christmas shopping period, and this should further soften the Chinese manufacturing sector.

Third, the U.S. Treasury did not name China, a currency manipulator, and this allows China to soften its currency to soothe the weakness in the manufacturing sector.

Fourth, the U.S. central bank will most likely continue to raise rates as in the next twelve months.

Time will tell if the USDCNY will indeed break it’s 2016 high, but if it does, I think we could see the EURUSD trade lower. See the second chart below as it shows how USDCNY and USDEUR move in unison.

USDCNY Monthly Chart

USDCNY (black line) vs. USDEUR (inv. of EURUSD, and blue line)

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About the Author

Alejandro Zambrano

Alejandro Zambrano combines extensive professional experience and a common-sense attitude to offer LondiniumFX members a strategy that focuses on making fewer, smarter trades and building members’ understanding of the markets and the rationale behind investing. He is also the Global Chief Market Analyst with and ATFX UK. Before founding LondiniumFX in 2016, Mr. Zambrano was Head Analyst at FXCM’s London desk.