DailyFX Tips & Picks: Why the Chinese yuan has been plummeting this year

A NEW and exciting currency pair has entered the stage and, with it, a strong rally. The newly introduced USD/CNH is the offshore equivalent of the Chinese yuan and, since the start of 2014, it has rallied by 2,300 pips. A rally in this case means a depreciation of the Chinese yuan. At the beginning of the year, one US dollar would have cost 6.02 Chinese yuan. The same US dollar would now cost 6.25 yuan.

Many explain that this decline is the result of the People’s Bank of China’s support for the Chinese economy. A weaker yuan makes it easier for the country’s exporters to sell their goods abroad. With China’s GDP growth rate currently undershooting the government’s annual target of 7.5 per cent, a lower currency is much needed. The current account surplus is only 2 per cent of GDP, a level we have not seen for a long time. As some speculators are also betting on a major collapse in the Chinese housing market by selling the CNH, others, who previously accumulated gains from the ever-rising Chinese yuan, are now experiencing a short squeeze, as they see their gains melt away.

Trading the USD/CNH is very much like trading any other currency pair; you need to have a view on the economy and on the potential actions of the central bank.

To read up on the Chinese yuan, please visit DailyFX.com and check out the latest price action using a demo account http://bit.ly/CNH2014

Alejandro Zambrano is a currency analyst at DailyFX. He leads DailyFX’s Premium Educational Seminars – http://bit.ly/PremiumEDU

Twitter: @AlexFX00