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USD/CNY Flat amid Broad Financial Market Slide, PBoC Tightening

February 23, 2021 at 17:50 by Andrew Moran

A fan of 50-yuan billsThe Chinese yuan traded relatively flat against its US peer on Tuesday as global financial markets are bleeding red ink for the second straight session. While the yuan has advanced to kick off 2021, the momentum in its rally has subsided, with the USD/CNY currency pair flatlining in February. Will the yuan target 6.4 or 6.5 against the greenback?

This week, China’s markets have been in the red on concerns that the People’s Bank of China (PBoC) will continue to allow additional capital outflows. This sent stocks sliding 3% and retreating from all-time highs.

Investors have been monitoring the central bank’s moves on interest rates. The institution left its benchmark loan prime rate (LPR) unchanged for the tenth straight month. The one-year LPR was kept at 3.85%, while the five-year LPR was flat at 4.65%. Also, the country’s three-month interbank offered rate climbed to 3%.

The PBoC refrained from injecting ample liquidity in its daily open market operations, leading to a net liquidity withdrawal of approximately $6 billion. This signaled that policymakers are winding down their fierce monetary support.

Overall, traders are perhaps nervous about the state of asset prices today as officials tighten monetary conditions. Thomas Gatley, an analyst with Gavekal Dragonomics, summarized the situation, telling The Financial Times that the PBoC is “in no mood to restimulate this year.”

London-based Capital Economics forecast that China’s gross domestic product (GDP) will not surpass the US in the next 30 years in a newly released report.

The most likely scenario is that slowing productivity growth and a shrinking workforce prevent China ever passing the US. And if it does overtake, China may struggle to hold on to first place.

In 2020, Beijing expanded its economy by 2.3% to $14.7 trillion, which is a little more than $6 trillion less than US GDP.

On the data front, housing prices climbed 3.9% year-over-year in January, up from 3.8% in December. Later this week, the manufacturing and non-manufacturing purchasing managers’ index (PMI) will be released by the National Bureau of Statistics (NBS) and Caixin for February.

The USD/CNY currency pair edged up 0.03% to 6.4665, from an opening of 6.4648, at 16:29 GMT on Tuesday. The EUR/CNY rose 0.04% to 7.8649, from an opening of 7.8596.

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