The exchange rate between the Offshore Chinese Yuan (CNH) and the U.S. Dollar has become a focal point for global macro traders as it approaches a critical threshold of 7.368.
On Jan. 7, 2025, André Dragosch, European Head of Research at Bitwise Asset Management, explained on the social media platform X why this matters — and why the implications could extend beyond traditional markets to Bitcoin and the broader cryptocurrency space.
China’s currency, the Yuan, comes in two forms. The Onshore Yuan (CNY) is used inside mainland China and tightly managed by the People’s Bank of China (PBoC), the country’s central bank. The Offshore Yuan (CNH), traded outside mainland China in places like Hong Kong, is more influenced by market forces. This makes it a key indicator of how international investors view China’s economic health.
The exchange rate between the Yuan and the U.S. Dollar reflects the Yuan’s strength. A weaker Yuan (a higher exchange rate) signals reduced confidence in China’s economy or mounting financial pressures. Dragosch’s post highlights that the PBoC is actively defending the Offshore Yuan at 7.368. This means the central bank is trying to prevent the Yuan from weakening past this level to maintain stability and avoid further economic strain.
The PBoC has several tools to influence the Yuan’s value. Dragosch mentioned two key strategies. First, the PBoC sets a daily midpoint (or “fixing”) for the Yuan’s exchange rate. By guiding the fixing lower, the PBoC signals its intent to strengthen the Yuan. Second, the central bank removes excess Yuan from circulation in the banking system. This is done through actions like selling foreign currency reserves or issuing central bank bills. By making the Yuan scarcer, its value increases, which helps stabilize the exchange rate.
These measures, while stabilizing the Yuan, create additional challenges for the economy. Tighter liquidity can make it harder for banks and businesses to access cash. This comes as the economy navigates existing headwinds, including challenges in the real estate sector, manufacturing, and consumer spending. Dragosch noted that high-frequency economic data already points to rising recession risks in China.
If the Yuan breaks past the 7.368 level, the PBoC may need to intensify its efforts to stabilize the currency. This could potentially deepen liquidity challenges, creating what Dragosch refers to as a “Yuan shock.” Such an event could lead to a sharp and sudden devaluation of the Yuan, with ripple effects on global markets.
For crypto traders, these developments are critical. Historically, periods of Yuan weakness have coincided with increased interest in Bitcoin as a store of value. Although China’s capital controls limit direct access to crypto, a significant devaluation could prompt Chinese investors to seek alternative assets, including Bitcoin.
A “Yuan shock” could also trigger broader turbulence in traditional financial markets, creating both risks and opportunities for crypto traders. While Bitcoin often moves alongside risk assets like stocks during initial market sell-offs, it could later benefit from its reputation as “digital gold” and a hedge against fiat currency instability. Additionally, the weakening of the Yuan could pressure other emerging market currencies, potentially increasing demand for Bitcoin in regions facing devaluation risks.
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