Chinese Yuan: A Key Factor for Crypto Traders to Watch

Amidst concerns, an observer suggests that the People's Bank of China's (PBOC) potential intervention to address yuan volatility might intensify the dollar index's ascent and compound the challenges faced by the crypto market.

The Chinese yuan (CNY) has depreciated by 2.7% against the U.S. dollar (USD) this month, its worst performance since September. Investment banking giant Goldman Sachs suggests it could drop further, leading to a strong dollar and continued monetary tightening worldwide. This could be a headwind for risk assets, including cryptocurrencies. Historically, yuan devaluation has been considered bullish for fiat currency alternative assets like bitcoin and gold.

The People’s Bank of China (PBOC) and the Chinese Yuan (CNY)

The People’s Bank of China (PBOC) manages the value of the Chinese yuan (CNY) against a basket of 24 currencies, with the US dollar having the highest weighting at 19.83%. The PBOC sets a daily fix or midpoint to provide direction to the market and allows the yuan to fluctuate 2% on either side of this midpoint. To maintain the yuan’s value, the PBOC actively buys and sells the currency, and buys the dollar against other currencies to keep the proportion of the greenback in reserves stable. This intervention ensures the currency is recycled back into other foreign units.

Global Financial Tightening and Risk Aversion

USD index rose as PBOC sold USD/CNY to maintain exchange rate stability within the 2% band. Global financial tightening and risk aversion have resulted from the struggle of borrowers with USD debt and non-USD earnings. Over $17 trillion of USD debt issued outside the US, according to David Brickell from Paradigm. The dollar index has risen 2.7% this month, while Bitcoin has dropped 7.3%, its most significant monthly loss since December.

Uncertainty Surrounding PBOC’s Actions

PBOC hints at more flexibility in yuan’s target band, potentially letting market forces determine the exchange rate. However, PBOC Governor Yi Gang emphasizes the bank’s authority to intervene during market turbulence. Noelle Acheson, ex-head of research at CoinDesk and Genesis Trading, sees potential dollar bullishness in PBOC interventions but cautions against uncertainty. She suggests that the PBOC may instead choose to diversify its reserves by buying gold instead of more US dollars.

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Kassidy Florette
Kassidy followed her friends to buy her first Bitcoin in 2015, has been participating in various projects since 2019 as a marketing communication lead. Her knowledge and passion brings her in as a contributor.