USD/CNH: the yuan at a 14-year low against the dollar

The yuan falls on the significant divergence of monetary policy with the dollar

The pressure is increasing on the Chinese yuan in the face of the divergence of monetary policies between the two central banks. The yuan has just sunk to its 2019-2020 lows and is now trading at its lowest level since 2008 against the dollar.

It must be said that the monetary policies of the People’s Bank of China (PBC) and the Fed are increasingly diverging. The BPC is increasingly easing its monetary policy in order to support the economic recovery, which is still being penalized by health restrictions which affect 30% of Chinese GDP, while the Fed is drastically raising its rates and accelerating its quantitative tightening (QT) which has been reaching since the beginning of the month of September 95 billion dollars per month.

The growing gap between US and Chinese bond yields is a good illustration of this growing divergence in monetary policy between the two countries. The yield on the 2-year US government bond is now 215 basis points higher than that of the Chinese government from 150 basis points lower at the start of the year. The spread between 10-year rates reached its highest level since 2007 at +125 bps against -125 bps at the start of the year.

The yuan should remain under pressure in the coming months, as it is extremely unlikely that the BPC will tighten its monetary policy in the current economic environment. Indeed, the central bank faces significant deflationary headwinds like Xi Jinping’s zero covid policy and property developer deleveraging.

USD/CNH weekly price chart – key levels


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