USD-CNY Trading

USDCNY is the ticker symbol for the United States dollar and the Chinese renminbi pair. USDCNY is classified as an exotic pair because one of its constituent currencies is that of an emerging nation, CNY, and it is paired with a major currency, USD. Exotic currency pairs are characterised by lower liquidity, lower trading volumes, higher volatility, and they often feature relatively higher spreads than major currency pairs.

In the USDCNY Forex rate, the USD is the base currency, while the CNY is the quote currency. This means that at any given time, the USDCNY price represents the amount of Chinese renminbi it would take to exchange for one unit of the US dollar.

History of USDCNY

The USDCNY combines currencies of two of the world’s largest economies. The US dollar is the official currency of the United States and its territories. The USD was introduced in 1792 when the US Congress passed the Coinage Act. The USD is popularly referred to as the ‘Greenback’, mainly because of the green colour of its notes throughout its history. It is issued and backed by the US Federal Reserve Bank. Since the end of World War I, the USD has become the world’s most held reserve currency. As of November 2021, 62% of global central bank reserves are held in USD, and over 100 countries have pegged their local currencies to the greenback.

The USD is also the main denominator of international trade. While the 1920s saw the USD emerge as a top global currency, the adoption of the Bretton Woods monetary system in 1944 was the most defining moment for the currency. Before that system, most countries pegged their currencies to Gold. It would, however, be agreed that nations pegged their currencies to the USD because the United States had the largest reserves of the precious yellow metal. By the time Bretton Woods was abolished in the 1970s, the USD had risen to be the most important currency in the global economy. The USD has experienced some inflation threats in its history, but it has always overcome them and is now regarded as the most stable currency in the world.

The renminbi is the official currency of the People’s Republic of China, but each individual unit of the currency is referred to as the Yuan. This is somewhat similar to the United Kingdom, where the official currency is the Sterling, but each unit is referred to as the pound. The renminbi was introduced by the People’s Bank of China (PBOC) in 1948, and it is the 8^th most traded and used currency in the world as of November 2021. From its introduction until the late 1970s, the renminbi was fixed at an overvalued rate as part of China’s import-substitution economic plan. This allowed the country to import high capital goods at a much lower domestic currency cost for its manufacturing industry. As the Chinese economy grew, the value of the renminbi was gradually allowed to be easily convertible within the global economy. In the 21^st century, the Chinese state has sought to internationalise the renminbi, and in 2015 it was rewarded as the IMF included the currency in its SDR basket. The PBOC is now considering a digital renminbi that will be based on blockchain technology.

The CNY was pegged at 8.27 per USD during the period of 1997-2005. This peg was removed, but another one was reintroduced during the 2008 Great Recession. However, since 2010, China has continued to reform its exchange rate system to allow for true valuation from the market. The USDCNY pair trended lower since the removal of the USD peg. By late 2013, it hit a low at circa 6.00. It would, however turn higher, and it managed to hit a peak at circa 7.00 by early 2017. In recent years, following up to 2021, the pair has traded within the 6.30-7.20 range.

Major Bodies and Factors Influencing the USDCNY

Federal Reserve

Commonly known as The Fed, the Federal Reserve is the central bank of the United States. The Fed releases interest rates and rate statements eight times a year. Higher rates and positive rate guidance tend to strengthen the USD and vice versa.

The People’s Bank of China (PBOC)

The PBOC is China’s central bank and an active player in the forex market. In addition to interest rates and other conventional monetary tools, the PBOC also sets a daily fix-a midpoint rate around which the renminbi can trade with 2% in either direction. The PBOC also routinely implements unconventional monetary policies that impact the sentiment around the value of the CNY.

Trade Wars

China is the world’s leading exporter. As a major trade partner of practically every country in the world, trade agreements and tariffs are a major influencer of the value of the CNY. During the 2019 US-China trade wars, China responded to US tariff increases by lowering the value of the CNY below its US peg.

USDCNY Correlations

Positively correlated assets tend to move in the same direction over time, whereas negatively correlated assets tend to move in opposite directions over time. The USDCNY pair positively correlates with currency pairs such as the EURNZD, EURSEK, EURAUD, and USDCAD. The USDCNY has also maintained negative correlations with pairs such as THE NZDJPY, GBPTRY, XAUJPY, and CHFJPY.