The trajectory of the USDCNH is a burning question as it approaches the highs witnessed in November 2022. Recent weeks have seen China's economic robustness wane, and as a result, attempts by its central bank to ease the situation have led to a weakening of the CNH. This dynamic becomes clearer when considering the interest rate differential between China and other nations. In contrast to the U.S., which is on a rate-hiking journey, China's recent interest rate reductions have amplified the rate gap between the two nations. Overlaying the USDCNH currency pair with this interest rate differential reveals a clear correlation: as the differential grows, the USDCNH rises in tandem, driven by the depreciating CNH against the USD. A possible factor behind this movement is the "carry trade", where investors borrow in CNH at low-interest rates to invest in higher-yielding assets.
USDCNH - Testing new highs
USDCNH - Testing new highs
USDCNH - Testing new highs
The trajectory of the USDCNH is a burning question as it approaches the highs witnessed in November 2022. Recent weeks have seen China's economic robustness wane, and as a result, attempts by its central bank to ease the situation have led to a weakening of the CNH. This dynamic becomes clearer when considering the interest rate differential between China and other nations. In contrast to the U.S., which is on a rate-hiking journey, China's recent interest rate reductions have amplified the rate gap between the two nations. Overlaying the USDCNH currency pair with this interest rate differential reveals a clear correlation: as the differential grows, the USDCNH rises in tandem, driven by the depreciating CNH against the USD. A possible factor behind this movement is the "carry trade", where investors borrow in CNH at low-interest rates to invest in higher-yielding assets.