Chinese currency drops sharply

Once again the Chinese currency CNY dropped, this time recording its biggest drop in 2 years. The message is clear China wants to deter hot money inflows ahead of a potential band widening.

Weaker Chinese economic data is also undermining demand for the CNY from exporters while the Chinese authorities want to increase the volatility of the CNY and engineer a degree of two way risk.

Chinese officials have played down the drop in the CNY and CNH but nonetheless, markets are seeing it as a shift in policy following recently weaker economic data. China’s Finance Minister Lou Jiwei noted that that move in the yuan is “within normal range” an indication that officials are not particularly concerned about the currency.

From a technical perspective the move in USD/CNY is significant. The currency pair touched 6.1227, breaching its 200 day moving average around 6.1018. The MACD (moving average convergence/divergence) has turned bullish too although the RSI (relative strength index) suggests that USD/CNY may be overbought.

Overall, expect further CNY weaknes in the short term (next few weeks) but dont expect this it to turn into a long term trend. Eventually CNY will resume an appreciation path assisted by continued strength in the country’s external balance.

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