PBOC signals weaker yuan as USD/CNH tests resistance – BBH

The Shanghai Composite Index recovered slightly today after diving by roughly 9% on Monday. China’s state fund manager, controlled by the Ministry of Finance, confirmed it had taken action to increase its holdings of stock market index funds and promised to buy more, BBH FX analysts report.

USD/CNH faces a multi-year resistance level at 7.3800

"Moreover, the People’s Bank of China (PBOC) signaled greater tolerance for a weaker yuan. The PBOC set the USD/CNY fixing at 7.2038, the weakest since September 2023, which pushed USD/CNH higher to 7.3600. USD/CNH faces a multi-year resistance level at 7.3800."

"While a weaker yuan would increase China’s external competitiveness, it would also further curtail the role consumption plays in the economy and worsen domestic imbalances. A currency depreciation is like a tax on consumption that lowers disposable household income and reduces spending. As such, a better way for China to achieve its long-overdue investment-to-consumer pivot is via a gradual revaluation of its currency."

"This could be the basis for a grand bargain between the US and China. Devaluing USD versus CNY would hit two goals at once: help US President Donald Trump achieve his core goal to revitalize American manufacturing activity and help rebalance China’s economy away from investment towards consumption."