USD/CNH: decline of the yuan after the re-election of Xi Jinping

The yuan weakens after the reappointment of Xi Jinping as the head of the CPC

The yuan begins the week down the day after Xi Jinping’s re-election as head of the Chinese Communist Party (CCP), which should allow him to run for a third presidential term next March.

USD/CNH is back to its recent high of 7.27 this morning. The yuan weakened after the re-election as Xi Jinping reaffirmed the merits of his “zero Covid” policy, despite its considerable impact on economic activity.

The yuan could also suffer this morning from the push for the exit of the former Chinese president during the closing ceremony of Congress, which raises fears of an even more authoritarian regime under Xi Jinping. Hu Jintao, who presided over China from 2003 to 2013, was tricked into rising from his seat alongside Xi Jinping and escorted out of the People’s Palace.

Beyond the CPC Congress this weekend, the outlook for the yuan had already been bearish for some time against the dollar due to the huge divergence in monetary policy between the two economies. Beijing is seeking to ease its monetary policy as much as possible while trying to limit capital outflows as much as possible, while Washington is raising rates at an almost unprecedented pace.

The spread between Chinese and US 2-year rates thus went from +150 basis points at the start of the year to -250 basis points last week and this spread should continue to widen as the terminal rate of the Fed is revised upwards by investors.

USD/CNH weekly price chart – key levels

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