The USD/CNH exchange rate is nearing 7.1200 because the US Dollar is gaining strength. This increase follows China’s October PMI announcement, which indicates a slowdown, according to currency experts. China’s official headline PMI has dropped by 0.6 points to 50.0, the lowest level since December 2022. The manufacturing PMI fell more than expected, from 49.8 to 49.0, while analysts had predicted a decline to 49.6. This change is linked to a shorter holiday in October and difficulties in global trade. On a brighter note, the non-manufacturing PMI met expectations, holding steady at 50.1 compared to 50.0 in September.

Shift in China’s Economic Strategy

Although the trade truce between the US and China might benefit China’s manufacturing sector, it is crucial to tackle domestic economic issues. China needs to focus on domestic consumption for long-term growth. A gradual increase in the value of China’s currency could help boost consumer spending by making imports cheaper, increasing disposable income. The current trend for the USD/CNH is downwards. As of now, the recent weakness in China’s October PMI significantly contributes to the rise in USD/CNH. The manufacturing figure dropping to 49.0 is especially troubling, indicating contraction and showing the ongoing difficulties in global trade. This weak data explains the pair’s testing of the 7.1200 level. This situation offers a short-term opportunity, particularly given the stronger US economy. The recent flash estimate of the US Q3 GDP at 2.9% shows the resilience of the US, which should support the Dollar in the short term. Traders might focus on strategies that benefit from further increases, potentially targeting the 7.1500 resistance level in the next week or two.

Long-Term Downtrend Remains Strong

However, we believe the long-term downtrend in USD/CNH remains the primary trend. China’s need to enhance domestic consumption suggests that a stronger currency is necessary over time. Thus, any price increases driven by short-term weak data should be viewed as opportunities to sell. For derivative traders, a patient approach is recommended. Waiting for the pair to rise before taking bearish positions is wise. Purchasing put options as prices approach the 7.1500-7.2000 range could be a smart tactic to prepare for the anticipated return of the downtrend. This strategy allows traders to benefit from the expected shift while taking advantage of the current upward momentum. We recall similar situations from 2023 when worries about China’s growth led to temporary spikes in USD/CNH above 7.30. Those spikes eventually subsided as policy support was implemented and the longer-term currency revaluation narrative reemerged. This historical trend suggests that selling into strength is preferable to chasing the current rally. In the upcoming weeks, we will closely monitor China’s Caixin PMI data for November to confirm this slowdown. Additionally, the next US inflation report and any forward guidance from the People’s Bank of China will be vital factors. These events will likely determine whether the current spike will continue or if the downtrend will reassert itself. Create your live VT Markets account and start trading now.

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