Chinese Yuan Falls to Six-Week Low as Central Bank Cuts Rates

The Chinese yuan fell to a six-week low on Monday as the rate cut by the Peoples Bank of China late last week reduced the yield advantage of Chinese assets, while the likelihood of more cuts worsened the sentiment.

The People's Bank of China cut the one-year lending rate, the benchmark rate, by 40 basis points to 5.6% and the one-year deposit rates by 25 basis points to 2.75%, causing Asian stocks to rally.

Meanwhile, the US Federal Reserve is preparing to hike the main rate there, a move which will further tighten the greenback supply.

USD/CNY rallied to 6.1364 on Monday, its highest since 9 October, and up 0.2% from the previous close of 6.1249. The pair had been on an upward trend so far in November and is headed for its first monthly rally after six months of losses.

The pair had touched an eight-month low of 6.1086 on 31 October before reversing the trend.

Fears of Deflation and Slowing Growth

Analysts are of a view that the surprise rate cut last week, which was the first since 2012, indicates the authorities are desperate to help shore up growth and evade negative pressures on the economy.

GDP growth of the world's second largest economy has fallen to a five-year low of 7.4% in the third quarter and the consumer price inflation has dropped to a four-year low of 1.6% in September.

The November inflation data will be published on 10 December and before that, official as well as HSBC PMI releases will likely provide more cues.

USD/CNY Technical Analysis

If analysts' concerns prove right, the yuan could be off to deeper lows, making upside technical levels more significant now.

However, considering the 2.6% rally in the yuan during April-October, the reversal this month is minor, so the downside technical levels of the pair are relevant too.

With the jump on Monday, USD/CNY has broken above the 50-day moving average and is now testing the resistance line of 6.1373. A break of that will open doors to 6.1533 ahead of 6.1712.

On the downside, the immediate support line is 6.1267. Upon breaking that, the pair will aim 6.1195 before a retest of the October low of 6.1086.