FxWirePro: Dollar strength might weaken Yuan to 6.85 per USD

Dollar’s strength is once again back in focus, especially after the European Central Bank (ECB) turned out to be more dovish than anticipated. The ECB announced that while the bond purchases will be tapered, it would continue at €30 billion per month till September 2018, once the current purchase at €60 billion per month expires at the end of the year.

The renewed focus on dollar’s strength as the U.S. Federal Reserve is set to increase interest rates at the December meeting and as the U.S. Congress pushes ahead with tax cuts and reform, might not bear well for some emerging market currencies, especially the yuan.

Chinese yuan’s bull run that began in the last week of December last year, seems to have ended in September with a peak at 6.44 per dollar. Since then the yuan has gradually weakened to 6.65 as of today. Over the longer horizon, the Trump administration’s crackdown on the deficit with China is likely to weaken the yuan, as well as the Chinese exports sector and that broad trend might also come into play and push the yuan to as low as 6.85 per dollar.

However, one must note that the bullish yuan trade that has been at play since last December hasn't completely died yet. Hence we urge close monitoring and stop loss for the trade no higher than 6.54 per dollar.