US Dollar May Keep Weighing on the Chinese Yuan if Exports Soften

Thoughts about USD/CNH! by using a multiple linear regression model to analyze it, and made a few changes since the last update in the first quarter of 2023. at first, let focusing on USD/CNH instead of CNH/USD. the second simplified the model by getting rid of variables that weren’t statistically significant anymore.
Let’s discuss how Chinese exports and global GDP affect exchange rates! Firstly, if Chinese exports increase year-over-year, it could mean that there is more demand for their currency. On the other hand, if demand for their goods decreases, that could negatively impact their currency value. Secondly, G20 real GDP (also year-over-year) can also play a role in exchange rates since China’s economy is closely linked to global business cycles. So, capturing worldwide growth is an important factor to consider.

Just wanted to share that we factored in the spread between 10-year Treasury yields and equivalent Chinese bonds. This helps us understand the difference between monetary policy expectations in the United States and China.
Considering the difference between the 10-year Treasury yield and the equivalent Chinese bond, the difference between monetary policy expectations in the US and China becomes understandable.

Good news: the model shows that when the world buys more Chinese goods and global growth increases, the Yuan goes up in value. On the flip side, when bond yields go up in the US compared to China, the Yuan tends to go down. Basically, there’s an inverse relationship between Chinese exports and G20 real GDP with USD/CNH.

By making this model and looking at Bloomberg’s second-quarter economic forecasts for three variables. With that information, we are able to estimate how USD/CNH might perform in Q2 with a bit of room for error. According to the model, it looks like USD/CNH could go up about 9% year-over-year in Q2, which is slightly less than the 9.9% increase we saw in Q1. Right now, USD/CNH is still within the margin of error from the Q1 forecast.

for the second quarter, it looks like the exchange rate zone might be around 7.52 – 7.08, which is up from before. This could mean that the US Dollar might be a bit stronger, but we should still be careful. The reason for this is that there’s an expected decline in Chinese exports by 6.0% year over year.

this zone could be useful in case prices go beyond this range. If the price drops below 7.08, it might mean that the US Dollar is oversold and vice versa. Of course, if conditions require it, we might see some performance outside of the error range.