The USA used the Second World War to increase the greenback importance in the international finance system. Let us discuss the Forex outlook and make up a USDCNH trading plan.

Fundamental yuan forecast for a year

War is when one fights to the last ditch, and another gets rich. Amid the pandemic and global economic recession, many people got ill, died, lost their jobs, went bankrupt. Others, on the contrary, adjusted, started businesses, and increase their fortunes. This is true for the whole countries. The deepest downturns in the USA, the euro area, and other advanced economies contrast with China’s continued expansion. The demand for Chinese exports is so high that Beijing may not worry about the longest, six-month, yuan strengthening. China seems to benefit from the COVID-19 pandemic just as well as the USA did after World War II.

In the 21st century, GDP per capita in China has doubled twice: from 2000 to 2006 and from 2007 to 2013. The IMF expects that the Chinese GDP per capita will double again in the period from 2014 to 2024. For a quarter of a century, according to this indicator, China will overtake 56 countries of the world, and the annual GDP growth rate will average 9.1%. The pandemic, which slowed down most states’ economies, played an important role in this process. The US dollar has strengthened greatly after the Second World War so that the renminbi could follow the same path.

According to HSBC, the yuan should have joined the G10 currencies list. The yuan is in the eighth place by the volume of conversion operations, and its impact on other assets is growing rapidly. According to the Bank for International Settlements, the volume of the renminbi transactions in Forex in April 2019 was $ 285 billion per day. In China’s domestic market in November, it reached $ 45 billion per day, the highest since December 2018.

Dynamics of yuan transactions in the Chinese domestic currency market

    

Source: Bloomberg

The Chinese economy is strong. It should be the driver of the world’s GDP during at least the next six months. It is evident from the forecasts of Bloomberg’s experts; they suggest the growth of the industrial production and investments into the core capital in October. China’s retail sales grew from 3.3% to 4.3% Y-o-Y, exports are growing at the highest rate since early 2019.

Dynamics of China’s industrial production and retail sales

Source: Bloomberg 

In addition to the divergences in the economic growth and monetary policies, the USDCNH bears are also encouraged by the inflow of direct investments in October (+18% Y-o-Y) over seven consecutive months, the widest ever gap between the yields on the Chinese and US government bonds.

Although Joe Biden, during his presidential campaign, promised to pursue a tough policy towards China, and after his election victory, urged allies to coordinate to counter China’s growing influence, he will hardly be worse than Donald Trump in terms of the US-China trade relations. On the contrary, the US could lower or even cancel the latest tariffs on Chinese imports. All these factors should strengthen the renminbi.

Yearly USDCNH trading plan

I believe the forecast I wrote in early October, suggesting 6.5 yuans for the US dollar, is out of date now. The USDCNH pair could go down to 6.32 over the next twelve months. Besides, a potential correction of the S&P 500 and increased demand for safe-havens will give a chance to buy the renminbi at a lower price.


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