The clamor that has surrounded China’s recent government policy of restricting overseas business even further and making it harder for many firms to do business in the People’s Republic is on the mind of many traders worldwide.
Taking a deeper look though at what’s currently affecting the price of the yuan means looking beyond these issues to consider the bigger picture of the Chinese economy and its dependence on imported commodities. The dollar against the offshore yuan is a notoriously difficult symbol to trade, but it doesn’t need to be this way if you can grasp its fundamentals well.
Understanding the relationship between commodities and the Chinese economy especially now can give forex traders the knowledge they need to make money trading USD-CNH.
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China’s enormous economic growth which has been sustained for decades has come with heavy reliance on large quantities of imported commodities, foremost among them crude oil.
Traders had noted strong gains for offshore renminbi until oil’s significant recovery around the middle of 2018. This also coincided with President Trump’s escalation of rhetoric on trade wars and threats of new and larger tariffs exchanged between the USA and China.
Despite these and dominant negative sentiment around the yuan in the middle of 2018, the dollar hasn’t been able to break the strong resistance level of 7 yuan.
The People’s Bank can certainly take some credit for this, but let’s not forget that the Chinese government has also been very clever in preventing fluctuations in the prices of commodities hitting the value of the currency much in themselves.
Controlling the entire commodity market in China, the government in Beijing has created and expanded what it calls a ‘commodities city’ in Yiwu. This city is completely under the auspices of the government. Heralded as ‘the International Trade City’ by the Chinese government, Yiwu’s full of every possible market from simple export of clothes to financial services and, of course, commodity exchanges.
Key for forex traders though is Yiwu Trading City’s commodity boom. Fuelled by the latest drop in prices of crude oil, many forex traders are starting to see the yuan as ready for a bounce.
The 24th China International Yiwu Commodities Fair has just taken place in October, driving traders’ interest in the details behind the economic data that come out every week from China.
Tumbling prices of oil over recent weeks combined with a government set on growth and control show that annual GDP growth rates around 6.5% could be sustained. Many traders are ready for the yuan to appreciate gradually but significantly against the dollar even before the end of 2018.
The fundamentals of both the American and Chinese economies remain very strong even after the latest slump in shares around the world. That said, the yuan has made gains against the dollar amid the equity selloffs, supported by cheaper oil and a higher base rate than in the USA, although volatility has been high.
This week in particular is a big one for the yuan, with a whole range of data releases coming up including annual industrial production on Thursday. A breakout for the yuan is quite possible if the data come in even slightly better than expected.
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