As the value of the U.S. dollar drops significantly, the value of the Chinese Yuan appreciates

As Beijing increased its easing measures in response to an economic crisis and the resurgence of COVID-19, which has resulted in economically damaging lockdowns, the yuan dropped to its lowest level since July on Monday. However, bears are battling the bulls across all US dollar pairs on Tuesday, and CNH is making a comeback.

As of this writing, the USD/CNH exchange rate is 6.8650, which is stable from the previous session but lower than its highs. From a peak of 6.8743 in January of 2018, the price has fallen to its current low of 6.8625. The rumor mill is busy turning forth new predictions about impending budget cuts. In its most recent monthly meeting, the PBOC decided to lower the prime rate on one-year loans by 5 basis points, to 3.65% from 3.7%, and the rate on five-year loans by 15 basis points, to 4.3% from 4.45%, so reducing the cost of existing loan payments. When hearing that interest rates have been lowered by authorities, however, the general consensus was that this was a positive development, despite the economy's overall decline.

We also do not expect any of these cuts to have an effect on the economy, with GDP growth still on track to fall below the official "around 5.5 percent" aim. Analysts from TD Securities have suggested that far more substantial governmental intervention is required to reverse the existing pressures on the housing market.

To make up for MLF maturity, China may reduce RRR this year, according to a report in today's Securities Times of China. The study suggests that if the RRR is lowered, prime lending rates will fall as a result. Take note that this is a government agency reporting on such concepts. Such words from the state-run news agency could continue to weigh on the yuan and provide support for the dollar in light of growing policy divergence between the United States and China and worries over eroding economic fundamentals.