The USDCNY pair is trading near its 2020 low once more as the Chinese currency strengthens on U.S. dollar weakness and a commitment from both superpowers to reach a phase one trade deal. Negotiations had been planned for August 15th but were postponed by President Trump who stated in an election rally, “I don’t want to talk to China right now.”
Traders should not be surprised if the trade talks rumble on for a further two months. China is not foolish and they will want to stall any major agreement until after the upcoming election is decided in November. Critics of Joe Biden say the Democratic hopeful would be more lenient with China and this is a criticism that President Trump often levies at his rival. We may see some token agreements over this period but it would be hard to expect anything more substantial.
The USDCNY rate has also strengthened with the broad sell-off in the U.S. dollar against the major currencies and commodities as traders re-evaluate their U.S. exposure. Aggressive stimulus efforts from the Federal Reserve saw a big expansion of their balance sheet, which left investors worried that the country could face an inflationary spike. Alongside this, we have seen a rise in civil unrest ahead of the elections and an increase in government spending with a second huge stimulus package being discussed.
On the economic front, China has fared better than the U.S. as the country only saw a drop in GDP of 6.8% in the first quarter before it resumed the growth path with a 3.2% expansion in the three months to June. The country will provide assistance to the tourism industry and the services sector to assist the recovery and these dynamics should ensure further strength in the Chinese currency.
On the monthly chart we can see that the Chinese Yuan has strengthened for a third-straight month and is probing the 2020 low at 6.8400. This figure also lines up with the 38.2% Fibonacci level, which is based on the rally from the 2018 lows. If the market goes through here then the 6.6700 level is next support, which brings the 50% Fib level into play. A close above 6.9300 on a weekly basis would be an opportunity to cut the short bias.
