Is China about to let the Yuan go for a wander? – USD/CNH analysis

PBOC Governor Pan spoke overnight and confirmed that they are still looking to continue their accommodative stance, albeit with no big changes likely. One thing they did touch on was that they are looking at purchasing their own Treasury bonds. However, they also said that wouldn’t be QE as styled in the West but more as a “liquidity-management tool”. However they spin it, buying ones own bonds is QE in one shape or another.

Those comments put CNY & CNH on a weaker footing but the comments from FX officials might be the big news. Among other comments, they said that they would be “resolutely preventing the exchange rate from overshooting”.

That comment would suggest that they are perhaps going to allow the yuan to weaken somewhat as long as any moves are not excessive. When officials drop hints about FX, they need to be heeded as they are very direct and can stop a currency in its tracks, or allow it to move a good amount.  USDCNY has been in an uptrend for pretty much all of 2024 and officials have had their state banks intervening to keep CNY from weakening too much. Now, they might be easing off the brakes.

For USDCNH, we’ve been up against a strong resistance level around 7.28 and so further CNY weakening will likely see this break and a move up to 7.30’s likely. I’ve been short USDCNH since 7.36 but have become a bit concerned by the price action over the last few weeks.

With these comments today, I’ve decided to exit the remaining short at 7.2759 as I won’t go against the possible implications from these comments. All things are starting point to reasons why USDCNH might be going higher rather than lower and I don’t want to stand in the way.

The proof of these comments will be seen by what happens now. One item to focus on now is the PBOC fixes, which have been stuck at the 7.10/7.11 levels for weeks. If they start creeping up, that will indicate that indeed, they are going to let the yuan move, and from that point, we’ll need to see where it goes from there and how fast.

This currency is great for trading with the rhetoric from the PBOC or state agencies. You will not find more explicit direction on a currency than in China and it can be a very good trade trading with those comments. I’m not looking to go long at this moment but I might if the boxes get ticked, like the fixes going higher and if we break the 7.28 level., or if we get further comments signaling a move.