When will Yuan transition from the red zone to the green zone? USD/CNY pair forecast

A year ago, many experts expected 2023 to be a banner year for the Chinese economy, but circumstances unfolded differently, with the Chinese currency landing in hot water. However, challenging periods can be the right time to add a new asset to your portfolio. Let's assess the potential of the Chinese yuan as a viable component of your investment strategy.

First, take a look at the chart illustrating Yuan’s disadventures in 2023. Over the span of ten months, the Chinese currency depreciated from 6.7 to 7.28. When discussing the Forex market, it's essential to acknowledge that such setbacks can be attributed to some specific and most often scheduled economic events. To have advanced knowledge of possible changes, investors and traders utilize economic data calendar, which tracks all markets around the globe.

The USD/CNY movements over the past five years also prove that these days' case is exceptional. To put this in perspective, even the challenges posed by Covid-19 in 2022 didn't cause so much damage to the currency exchange rate.

A variety of factors have contributed to the current exchange rate situation between the US and China. The Federal Reserve has raised the interest rate much more aggressively compared to other major central banks. This policy, combined with the US dollar’s well-known safe haven status, has increased its global appeal. By the fall of 2023, investors have also encountered peak yields on the US treasury bonds.

At the same time, the situation in China was frankly bad. The country lifted its Covid restrictions much later than most others, and market expectations for a rapid economic rebound were not met. Instead, the country was hit with a massive crisis in its real estate market marked by discussions of developer bankruptcies that persisted after the Covid-related hiatus.

By November 2023, the Chinese economy had shown signs of improvement compared to previous months. Import and export volumes have been declining at a slower rate. Plus, Chinese officials expressed optimism about achieving their GDP target for 2023. The International Monetary Fund (IMF) also raised its growth projections for the Chinese economy. In essence, while progress may be gradual, it is undeniably underway.

Looking ahead to 2024, the outlook for the US dollar appears uncertain. The Federal Reserve is expected to reduce interest rates, which will likely result in lower bond yields. This doesn’t mean that the USD won’t appreciate against the CNY shortly, but the yuan's future prospects definitely look better than several months ago.

While specific exchange rate targets are hard to pinpoint, analysts are revising their forecasts for the yuan, placing it in a range of 7 to 7.5 against the US dollar in 2024, which is a more favorable outlook than a few months ago.