The offshore Chinese Yuan (USD/CNH) reversed its recent losses, trading at approximately 7.3490 during early European hours. This followed a slight increase in the USD/CNY central parity rate set by the People’s Bank of China (PBoC) at 7.1887, up from the previous day’s 7.1879, and in line with Reuters’ estimate of 7.3435.
The recent uptick in the USD/CNH exchange rate can largely be attributed to the continued strength of the US Dollar. This surge is driven by a shift in investor sentiment following stronger-than-expected US economic data, particularly the ISM services report, which indicated higher levels of activity and rising prices. These developments have intensified concerns about persistent inflation, leading traders to anticipate more aggressive policy tightening by the Federal Reserve.
Market participants are now closely monitoring upcoming US economic reports, including the Nonfarm Payrolls (NFP) data and the latest Federal Open Market Committee (FOMC) meeting minutes, which are expected to provide further guidance on the Fed‘s interest rate trajectory.
In contrast, the Chinese Yuan has come under pressure, as market sentiment surrounding China’s economic outlook remains cautious. The Yuan’s weakness was further compounded by President-elect Donald Trump’s dismissal of reports suggesting that his administration’s economic strategy could target sectors critical to US national security.
The PBoC, in collaboration with China’s State Planner, is working to support the domestic economy. PBoC official Peng Lifeng stated that the central bank will help banks expand loans under the trade-in initiative, signaling ongoing efforts to stimulate economic growth.
However, analysts remain skeptical about China’s near-term economic prospects. Volkmar Baur, an FX strategist at Commerzbank, pointed out that the yield on 10-year Chinese government bonds has recently dropped to 1.58%, while the yield on 2-year bonds briefly fell below 1% earlier this week. This suggests that markets expect further significant easing from the PBoC, as well as continued low interest rates in China.
As traders await key economic data from China later this week, including inflation figures, the focus will be on assessing the health of the world’s second-largest economy, which remains under pressure from both domestic and international factors.
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