Independent market research for the future investor.

( Written by Nathan Nowbuth and Sulaiman Syed Naqvi )

For many years, America and China have been at the forefront of economic debate. The U.S. economy has been the global standard for decades whilst China has become the fastest developing economy in the world and in 2014, even surpassed America as the world’s largest economy. Staggeringly, these two global giants possess more than 32% of the worldwide GDP implying the two countries together account for 1-in-3 dollars spent globally, illustrating their sheer dominance.  

Nonetheless, their relationship has been anything but rosy with a fierce rivalry having ignited. An ongoing trade-war, geopolitical pressures concerning Hong Kong, tensions over the Coronavirus pandemic outbreak and most recently, the whole fracas surrounding TikTok are all contributing factors to the marred connection these two countries share.  

As can be seen on the one-year timeframe chart, two large falls in USD/CNY can be observed. The bearish low indicated by the orange bubble can be attributed to the effects of Covid-19 where the exchange rate was USD 1: CNY 6.84 (the lowest point since July 2019). Moreover, the weakening performance of the currency pair indicated by the blue bubble is mainly due to the intensifying effects of the TikTok saga alongside further strains in trading negotiations between the nations. 

However, when the timeframe of the chart is altered to a five-year period, a clearer picture is painted of the currency pairing’s volatile nature. Overall, an up-down-up trend can be extrapolated and once again, certain movements on this chart can be associated with events in the news. For instance, the enormous downtrend in 2017/18, where the exchange rate fell to USD 1: CNY 6.26, is predominantly due to heightened escalations in the trade war. The main focus of this article will be to delve deeper into understanding the ongoing trade war, a chain of proceedings which have gripped the FX and stock markets alike. In addition, briefer analysis will be cover other key events which have caused the Dollar and Yuan’s value to become quite unpredictable, as well predicting future trends of the currency pairing.  

Fundamental analysis: 

The trade war between the U.S. and China originated as far back as 2010 when the U.S. trade deficit with China rose from $273.1 billion in 2010 to an all-time high of $295.5 billion in 2011. Figure 1 below shows how the US-China trade deficit has grown progressively over time. A growing trade deficit isn’t good for an economy as it suggests its industries are not as productive or competitive from a global perspective and there is an overreliance on cheaper imports. Therefore, this will play a negative role on the country’s balance of payment, future GDP potential and levels of employment. In 2012, President Obama announced new efforts to enforce U.S. trading rights in China.  

However, since the 2016 presidential campaign of current President Trump, the trade war has featured more prominently in affairs. In March 2018, the ‘Trump Administration’ announced sweeping tariffs on Chinese imports, amounting to at least $50 billion in response to alleged Chinese theft of American technology and intellectual property. This escalated further in July 2018 as Trump imposed new measures where more than 800 Chinese products in the industrial and transport sectors such as medical devices and televisions would face a 25% import tax. China retaliated by levying tariffs of their own on more than 500 U.S. products such as soybean, automobiles and marine products such as lobsters.    

These measures were seen as robust at the time but fast-forward to May 2019, Trump raised tariffs from 10 percent to 25 percent on $200 billion worth of Chinese goods, whilst counter measures were once again established, and China retaliated by implementing tariffs on $60 billion worth of American goods. From the U.S’s perspective, the overarching goal of these actions were to force the Chinese government to strike a favourable deal and dismantle China’s power to manipulate the international trading system, although this notion was immediately dismissed by China’s Foreign Security who said the United States had ‘extravagant expectations’.  

Overall, the trade war has thus far cost America and China a combined $700 billion worth of trade and has severely affected particular industries in both countries, with U.S. steel facing job losses of over 460,000 for example. However, there has been recent hope for U.S.-China relations. On January 15^th 2020, the ‘Phase one’ Trade Deal was signed by President Trump and Chinese Vice Premier Lui He, which calls for China to: 

• Increase purchases of U.S. agricultural and manufactured products, energy and services by $200 billion over two years 
• Enable increased U.S. access to China’s financial services markets 
• Various improvements in intellectual property protections.  

This deal has represented a boost in confidence to both economies and has been reflected by a USCBC survey in which 88 percent of respondents said it represents a ‘positive’ or ‘somewhat positive’ view to the deal as it “makes the bilateral relationship more stable and decreases chances for further tariff escalation.” Furthermore, since the unexpected effects of Covid-19, which lead to currency depreciations in all markets, the value of USD 1 rose above CNY 7 showing how this news has enabled the currency pairing to rebound quicker than others.  

Hence, does this mean the outlook for USD/CNY appears to be brighter in the future? Perhaps not so. In fact, only 7% of respondents to the annual membership survey for the US-China business Council said the benefits from the Phase 1 agreement would outweigh the cost of tariffs incurred. Moreover, negotiations on a Phase 2 agreement covering more complex technological transfers, industrial subsidies and data restricted have been shelved due to wider controversies surrounding the countries, as well as uncertainty from the long-term implications of Covid-19. Some of the major controversies alluded to include:     

• China’s latest plans to impose national security laws on Hong Kong which has caused soaring tensions between Washington and Beijing*. The Yuan notably fell below the key level of 7 to the US dollar in August 2019 (back then, this was the first time in 11 years), as levels of rioting reached their pinnacle. Additionally, investment flows into Hong Kong from China increased through ‘Stock Connect’ as investors shorted Yuan amidst fears of the currency weakening further due forecasted impacts on tourism and retail spending. As long as these protests continue, there is no guarantee that the Yuan will not be adversely affected. 

• Trump’s threats to ban the Chinese-owned video app, TikTok from the U.S. market due to national security concerns over the data collected by the app’s creator, ByteDance, unless it is sold to a U.S. buyer by mid-September. This is the same for the chat-app WeChat. Since over 74 million people in America use TikTok, banning such an app would have negative ramifications of USD markets and therefore increase the likelihood of USD/CNY further depreciating.  
• America’s banning of Huawei from operating in the country with worries, once again, over cyber espionage and potentially giving China the upper hand in any potential cyber war. 
• The U.S. labelling China as a ‘Currency Manipulator’ after Chinese central banks used monetary policy to artificially weaken the Yuan so the implementation of U.S. tariffs on Chinese exports would be significantly offset by the weaker currency. 

In summary, it is evident that there are a multitude of factors affecting the performance of USD/CNY. The fact these two economies are so large and release vast volumes of financial and political findings every day, makes it hard to distinguish whether the amalgamated effects of events related to the two countries are positive or negative. Be it an 86% increase in pork prices due to flooding causing food shortages in China, or the potential development of a nasal spray in San Francisco to fight Coronavirus, the relatively weighting on these events effects on the currency pairing is almost impossible to predict and thus makes this currency pairing rather unpredictable.  

*for more insight on the Hong Kong protests, read the Washington Post article titled ‘What is happening in Hong Kong’ at https://www.washingtonpost.com/world/2020/05/21/hong-kong-independence-china-faq/ 

Technical Analysis 

The USD/CNY has once again tested a significant level of support at the 6.95000 region, at the moment there is no clear indication of a reversal of the downtrend from this zone, however over the next few days we will have a better understanding of whether the market establishes a downtrend or whether a reversal will lead us into further consolidation. 

The charts have also presented two strong biases to the sell. Firstly, the USD/CNY has broken below the 50 exponential moving average and secondly, there have been two lower lows that have presented themselves. From here on we have strong reason to enter for a sell however we should closely consider the reaction from the market from the 6.95 zone of support, for confirmation for entry.  

Much is the same for the smaller time frames including the four and the one-hour charts, however they show a much stronger bias to the downside. For investors predominately looking for day trade entries. A closer look at the candlesticks along with the Bollinger bands would be appropriate in such a case. 

At present the candles have moved away from the bottom Bollinger band and made way towards the central 50 EMA. From this we understand that in the short run we can look for a move to the downside once the market approaches the topmost Bollinger band – which is overlapped with the strong region of support, this confluence would be a strong reason for entry. To strengthen our bias, we could also look for supporting candlestick patterns. 

Jargon Buster: 

• Bilateral Relationship: This is the acceptance and respecting acknowledgment of political, social, economic and cultural conducts of two different countries 
• Bollinger Bands: A Bollinger Band is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security’s price, but which can be adjusted to user preferences. 
• EMA: The exponential moving average (EMA) is a technical chart indicator that tracks the price of an investment (like a stock or commodity) over time. The EMA is a type of weighted moving average that gives more weighting or importance to recent price data. 
• Shorted: This is a term for holding a ‘sell position’. Individuals short a currency or stock in advance of acquiring them, with the aim of making a profit when it’s price or value falls 
• Tariff: A tax or duty to be paid on a particular class of imports or exports 

• Trade War: A trade war is a situation where countries restrict each other’s trade by imposing tariffs or quotas on imports 

References 

Anon, 2019. Escalating Trade War Threatens 460,000 Jobs in Steel Industry. [online] IndustryWeek. Available from: https://www.industryweek.com/talent/article/22026588/escalating-trade-war-threatens-460000-jobs-in-steel-industry [Accessed 12 Aug. 2020]. 

Anon, 2019. Hong Kong protests explained in 100 and 500 words. [online] BBC News. Available from: https://www.bbc.co.uk/news/world-asia-china-49317695 [Accessed 12 Aug. 2020]. 

Anon, 2020. [online] Available from: https://uk.tradingview.com/chart/ZAFRBNzd/ [Accessed 12 Aug. 2020]. 

Anon, 2020. [online] Insightsonindia.com. Available from: https://www.insightsonindia.com/wp-content/uploads/2018/07/US-China-Trade-War.pdf [Accessed 12 Aug. 2020]. 

Anon, 2020. The 2017 results of the International Comparison Program China, US and EU are the largest economies in the world. [online] Ec.europa.eu. Available from: https://ec.europa.eu/eurostat/documents/2995521/10868691/2-19052020-BP-EN.pdf/bb14f7f9-fc26-8aa1-60d4-7c2b509dda8e [Accessed 11 Aug. 2020]. 

Anon, 2020. U.S. Relations With China. [online] CFR. Available from: https://www.cfr.org/timeline/us-relations-china [Accessed 12 Aug. 2020]. 

Bacon, J. and Flores, J., 2020. COVID news: Antiviral nasal spray; Texas cases spike; Ky. Derby plans. [online] usatoday. Available from: https://eu.usatoday.com/story/news/health/2020/08/12/covid-news-antiviral-treatments-pac-12-big-ten-postpone-football/3347177001/ [Accessed 12 Aug. 2020]. 

Ball, J., 2019. What’s really behind the US’s Huawei ban?. [online] Newstatesman.com. Available from: https://www.newstatesman.com/spotlight-america/cyber/2019/11/whats-really-behind-uss-huawei-ban [Accessed 12 Aug. 2020]. 

Lawder, D. and Orlofsky, S., 2020. Few U.S. firms see Trump’s Phase 1 China trade deal as worth tariff costs, survey shows. [online] Reuters. Available from: https://www.reuters.com/article/us-usa-trade-china-companies/few-u-s-firms-see-trumps-phase-1-china-trade-deal-as-worth-tariff-costs-survey-idUSKCN2572GS [Accessed 12 Aug. 2020]. 

Meltzer, J. and Shenai, N., 2019. The US-China economic relationship: A comprehensive approach. [online] Brookings.edu. Available from: https://www.brookings.edu/wp-content/uploads/2019/02/us_china_economic_relationship.pdf [Accessed 12 Aug. 2020]. 

Mohsin, M., 2020. 10 TikTok Statistics That You Need to Know [July 2020]. [online] Oberlo.co.uk. Available from: https://www.oberlo.co.uk/blog/tiktok-statistics [Accessed 12 Aug. 2020]. 

O’Grady, S. and Berger, M., 2020. What is happening in Hong Kong?. [online] The Washington Post. Available from: https://www.washingtonpost.com/world/2020/05/21/hong-kong-independence-china-faq/ [Accessed 12 Aug. 2020].