USD/CNH: Yuan falls after Xi Jinping’s re-election

The yuan weakens following the reappointment of Xi Jinping as head of the CPC

The yuan begins the week down the day after Xi Jinping’s re-election as head of the Chinese Communist Party (CCP), which should allow him to run for a third presidential term next March.

USD/CNH is back to its recent high of 7.27 this morning. The yuan weakened after the re-election as Xi Jinping reaffirmed the benefits of his “zero Covid” policy despite its significant impact on economic activity.

The yuan is also suffering this morning under the pressure of the former Chinese president’s exit during the closing ceremony of the congress, raising fears of an even more authoritarian regime under Xi Jinping. Hu Jintao, who presided over China from 2003 to 2013, was tricked into getting up from his seat with Xi Jinping and escorted out of the Palace of the People.

In addition to the CPC Congress this weekend, the outlook for the yuan had already been bearish against the dollar for some time due to the wide divergence in monetary policy between the two economies. Beijing is seeking to ease its monetary policy as much as possible while trying to limit capital outflows as much as possible, while Washington is raising interest rates at an almost unprecedented pace.

Thus, the spread between Chinese and US 2-year yields went from +150 basis points at the start of the year to -250 basis points last week, and this spread should continue to widen as the Fed’s terminal rate is adjusted upward by investors.

USD/CNH Weekly Price Chart – Key Levels

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