- Weakening Yuan
- Slowing Chinese Economy
- Strengthening Greenback as Safe Haven
The Chinese Yuan should is on the defensive against the U.S Dollar as U.S-China relations continue to deteriorate. The greenback has continued to strengthen against the Yuan, in recent weeks, on the Peoples Bank of China setting the exchange rate at 12-year lows, in a bid to cushion the slowing economy.
With the PBOC setting the exchange rate at ¥7.14, a strengthened dollar should continue to weigh in on Yuan’s weakness. With the pair trading at ¥7.14, analysts at Goldman Sachs believe a weakened Yuan could see the exchange rate increasing to ¥7.25 over the next three months.
While the exchange rate is expected to recover towards the ¥7.15 level, it would still be much higher than initial targets of ¥7.05 and ¥6.90. Weakness in the Yuan does not come as a surprise as the industrial dependent economy has come under pressure in the wake of lockdowns prompted by the COVID-19 pandemic.
While the manufacturing sector has shown signs of recovery in recent months, it is still a shadow of itself. The official manufacturing Purchasing Managers Index by the National Statistics Bureau came in at 50.6 in May, affirming expansion. However, it came below 50.8 for April and below the 51 levels predicted by analysts.
The disappointing PMI data indicate that the second-largest economy is yet to recover from the economic impact of the COVID-19 epidemic. Rising tensions with the United States over Hong Kong is the latest tailwind that raises serious concerns over an accelerated bounce back.
Conversely, the Yuan is likely to weaken against the greenback, which continues to strengthen amidst the rising tension given its safe-haven attributes. Likewise, capital outflow out of China should continue to weigh in on the exchange rate, which should see the USD/CNY exchange rate continues to edge higher.