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Chinese Yuan Strengthens to Five-Month High Despite Disappointing PMI

August 5, 2020 at 13:52 by Andrew Moran

A fan of 50-yuan billsThe Chinese yuan is strengthening against the US dollar midweek, despite disappointing economic data. The yuan has been gaining momentum against the greenback, primarily due to the rebounding economy and the buck languishing in recent weeks. With the central bank suggesting that it will not enhance its aggressive monetary policy efforts, could the world’s second-largest economy continue its recovery?

Speaking to local media outlets, People’s Bank of China (PBoC) Chief Adviser Ma Jun forecasts that the Chinese economy will expand about 2% in 2020, adding that there is little need to ramp up counter-cyclical adjustments to its stimulus and relief endeavors. It should be noted that the federal government has dismissed making gross domestic product (GDP) projections due to uncertainty from COVID-19.

On Wednesday, the Caixin services purchasing managers’ index (PMI) slipped in July from the previous month: 54.1 compared to a ten-year high of 58.4. New exports and employment fell, but new orders and outstanding business increased. Business sentiment strengthened to a five-year high.

The private sector survey of the composite PMI came in at 54.5 in July, down from 55.7 in June, as services activity rose at a slower pace. New orders, prices, and output price inflation jumped, and business expectations advanced.

Analysts are betting on a wider yield spread between the world’s two largest economies. Since the PBoC is suggesting it is hitting the pause button on the ultra-aggressive accommodation, and the Federal Reserve promising to maintain its unprecedented money-printing scheme, investors are pointing to a divergence that would affect foreign exchange markets.

Put simply, the US central bank is embarking upon a strategy of “do what we can, and for as long as it takes,” and the PBoC will only allocate policy prescriptions to sectors that are in dire need.

It is unclear if the two sides will move forward with a phase-two trade agreement. President Donald Trump has conceded that it is no longer a priority, and the Chinese leadership has fallen behind on the provisions of the first phase deal.

The USD/CNY currency pair tumbled 0.5% to 6.9382, from an opening of 6.9735, at 13:45 GMT on Wednesday. The EUR/CNY rose 0.19% to 8.2491, from an opening of 8.2311.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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