The Chinese yuan has strengthened recently, reaching a level of 7.043 against the US dollar, its strongest level since October 8. This represents a 1% increase in this quarter, and a 4% increase from the April low of 7.3504 against the dollar.
Historically, there has been no direct impact of yuan fluctuations on bitcoin prices, with unsubstantiated rumors that a weaker yuan drives Chinese capital towards cryptocurrencies. However, the strength of the yuan indirectly affects bitcoin through macroeconomic channels and foreign exchange markets, possibly creating a more favorable environment for cryptocurrency by influencing global money flows.
The strengthening of the yuan reduces import costs, alleviating downward pressure on domestic inflation and giving Chinese policymakers room to implement economic stimulus measures to combat deflationary pressures. Calls for stimulus have increased recently amid weak data in retail sales and corporate investment, which may offset rising borrowing costs in Japan and Australia, and the slow reduction in interest rates by the Federal Reserve, supporting risk assets like cryptocurrencies.
In foreign exchange mechanisms, a sustained rise in the yuan may lead the People's Bank of China to purchase dollars against the yuan to curb its strength, thereby increasing the money supply as yuan is printed. These dollars are recycled by selling them for other currencies (such as euros or yen) to maintain China's reserve balance. This process contributes to a weaker dollar index, enhancing easier liquidity conditions and increasing demand for dollar-denominated assets like bitcoin.
Overall, a combination of stimulus and a weaker dollar resulting from the strength of the yuan could support bitcoin prices by improving liquidity and risk appetite, although the coming weeks will show whether this helps stabilize bitcoin's position in the market.
