Bitcoin’s One observer said prices often move to the rhythm of global capital flows, and currently, the yuan’s strength could set the stage for a more bullish backdrop for cryptocurrencies.
Earlier on Wednesday, the yuan was trading at 7.043 against the dollar, its highest level since October 8. The yuan has gained about 1% against the U.S. dollar in the quarter and is up 4% from April’s low of 7.3504 against the U.S. dollar.
Historically, the yuan has not had much direct pull on Bitcoin prices. There have been rumors for years that a devaluation of the yuan would drive Chinese capital into the cryptocurrency space (and vice versa), but there has been zero conclusive evidence.
However, London CryptoClub, a newsletter service company, said that fluctuations in the value of the yuan may still affect Bitcoin through macroeconomic channels and the foreign exchange market. The founder of the company said that the continued strength of the yuan may bode well for the price of Bitcoin.
The founder of the newsletter service told CoinDesk: “When the yuan strengthens, it provides cover for China to step up stimulus and easing policies to combat the deflationary spiral they are fighting.”
A stronger currency makes imported products cheaper, putting downward pressure on domestic inflation. This in turn creates space for policymakers to provide economic stimulus.
Coincidentally, calls for Chinese stimulus have grown as the yuan has strengthened following a slew of dismal retail sales and business investment data earlier this week.
The stimulus could offset an expected increase in borrowing costs in Japan and Australia and the prospect of a slower pace of rate cuts by the Federal Reserve, supporting risk assets including cryptocurrencies.
Now, coming to the Forex section. Continued gains in the yuan could prompt the People’s Bank of China to intervene by buying USD against the yuan.
Not only are these dollars sitting idle; They are recycled or sold against other currencies to maintain a stable mix of currencies in the reserve portfolio, which holds trillions of dollars, euros, yen and other major currencies.
This recycling operation ultimately dragged the U.S. dollar index lower. It’s no secret that a weaker dollar tends to increase demand for dollar-denominated assets like Bitcoin and lead to looser financial conditions (cash is cheaper).
“Operating smoothly to slow down the strength means increasing the money supply, as they effectively print yuan to buy dollars. These dollars are also ‘recycled’ and sold against other currencies to maintain a stable foreign exchange weighting in their portfolios,” the founders said.
“This adds to broad dollar weakness. Taken together, this all leads to a looser liquidity environment, which should benefit Bitcoin,” they added.
The coming weeks will show whether this backdrop can stabilize Bitcoin’s slide and help the market find its footing again.
