USD/CNH price forecast: Beijing lockdowns pressure yuan as PBOC monitors

Tuesday’s Asia-Pacific outlook

Asia-Pacific markets look set for a risk-on open after traders turned bullish overnight, pushing US stocks higher into the close after a volatile day of trading. China’s capital, Beijing, expanded mass testing to 12 districts through April 30. The current outbreak may be worse than initially expected, with policy makers saying the virus may have been spreading for a week now. Chinese stock indexes closed with losses on Monday.

The lockdown in China weighed on economic growth outlooks after the country doubled down on its ‘Zero-Covid’ strategy. White House Press Secretary, Jen Psaki, said that the United States hasn’t seen a reduction in volume from Asian ships yet. The longer the lockdowns across China go on will only increase the chance for shipping disruptions, which could increase inflation at a time when many believe it has peaked.

The People’s Bank of China (PBOC) moved to limit the sharp drop in the Chinese yuan by cutting the amount of money that banks need to hold. The PBOC’s statement, on Monday, reduced the level of foreign currency holdings required by banks from 9% to 8%. The move should increase the amount of dollars in the Chinese economy.

Still, the 2% cut may not do enough to slow the Yuan’s descent. The PBOC may need to intervene with another cut or more direct measures, such as intervening directly with yuan purchases, to stem the flow out of the currency. The Fed’s recent shift toward more aggressive tightening and the Covid-19 lockdown disruptions have put immense pressure on the currency. This morning, South Korea reported first-quarter gross domestic product (GDP) growth of 0.7%, beating the 0.6% q/q Bloomberg consensus estimate. Japan’s March unemployment rate will cross the wires later this morning.

USD/CNH technical outlook

USD/CNH is coming off five consecutive daily gains, with prices briefly rising above the 2021 April swing high before trimming strength. The MACD and Relative Strength Index oscillators are at the highest levels since September and August 2019. Those extreme readings may suggest a pullback is in order. The 6.5 psychological level may offer support if that pullback does occur.

USD/CNH daily chart

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