Yuan wakes up. Forecast as of 18.10.2023

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China’s domestic data are improving. Many investors expected the Chinese economic recovery earlier, and they are unwilling to bet on the yuan now. However, the USDCNH bears are to go ahead soon. Let us discuss the Forex outlook and make up a trading plan.

Monthly yuan fundamental forecast

Betting on China at the beginning of the year seemed like a win-win. Judging by the rapid recovery of the economies in the USA and the euro area after exiting lockdowns, investors seriously expected that history would repeat itself in China, and 2023 was supposed to be a year of rapid GDP expansion. Time passed, but the expected economic boost did not happen. China’s economy did not live up to expectations, which supported the USDCNH uptrend. The pair has been trading sideways in autumn, suggesting a soon trend reversal.

In July-September, China’s economy slowed down compared to the same period in 2022 from 6.3% to 4.9% and accelerated compared to April-June from 0.5% to 1.3%. Both figures turned out to be better than Bloomberg experts’ forecasts, which allowed the yuan to strengthen for a while.

Dynamics of China’s GDP

Source: Wall Street Journal.

Furthermore, the retail sales report for September was stronger than expected. Over the previous 12 months, GDP grew by 5.2%. So, the Chinese government claimed that the GDP rate should expand by just 4,4% in the October-December period to meet the government’s 5% target.

After all, the rise in consumption has outweighed the crisis in the housing market and a slowdown in exports due to the large-scale fiscal and monetary stimulus. By the way, the rate of supplies of Chinese goods and services abroad is gradually improving: in September, exports decreased by 6.2%, less than by 8.8% in August. Reuters experts predicted a decline of 7.6%. At the same time, the People’s Bank of China is not to stop: at the beginning of the third week of October, it injected $108 billion of liquidity into the banking system.

At the same time, the Chinese economy still looks vulnerable. A strong economy cannot have weak inflation, and China faces deflation, unlike most other countries in the world.

Dynamics of inflation worldwide

Source: Financial Times.

In the long term, China will face such problems as cooling relations with the West, a worsening demographic situation, a difficult reorientation to consumption-based GDP growth, and a refusal to invest in real estate. Not surprisingly, the IMF forecasts a slowdown in gross domestic product from 5% in 2023 to 4.2% in 2024.

On the other hand, the US economy will gradually cool the Fed’s monetary tightening. The risks of a recession will grow, and investors will resume discussing the Fed’s dovish turn. In such a situation, the US dollar should weaken, and the yuan could strengthen.

Monthly USDCNH trading plan

The yuan could strengthen soon. Therefore, when the USDCNH goes below the support at 7.3, it will be relevant to sell. A rebound from resistance at 7.34-7.345 and 7.36-7.37 is also suitable for entering shorts.

Price chart of USDCNH in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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