Measures taken by the People’s Bank of China (PBOC) to stabilize the yuan amid a stock market decline may exert downward pressure on Bitcoin’s price, according to a crypto market observer. China‘s currency is facing fresh depreciation challenges due to persistent deflationary risks and a struggling property market, causing foreign investors to withdraw capital.
Beijing’s latest actions to mitigate these issues present a downside risk to Bitcoin (BTC) via foreign exchange dynamics. The Chinese yuan (CNY), which operates under a managed float system, has dropped 1.39% against the U.S. dollar, with its offshore version (CNH) falling by 1.25%. The Shanghai Composite Index has also plunged by over 7%, reaching its lowest point since March 2020.
The PBOC pegs the yuan to a basket of 24 currencies, allowing it to fluctuate within 2% of the daily reference point. Recently, state-owned Chinese banks have sold U.S. dollars onshore while tightening liquidity in the offshore market to support the yuan. As a result, the one-week CNH Hong Kong Interbank Offered Rate rose to 4.95045%, the highest since late September.
Such moves could lead to broader U.S. dollar strength, tighter global financial conditions, and reduced risk appetite among investors, potentially affecting Bitcoin and tech stocks. When the PBOC sells U.S. dollars to support the yuan, it must purchase other currencies to maintain the balance in its foreign exchange reserves, potentially boosting the dollar index (DXY).
Bitcoin has historically been inversely correlated with the U.S. dollar. The cryptocurrency’s 50% rally in Q4 2023, largely driven by spot ETF optimism, occurred as the dollar index fell by 4.5%. David Brickell, head of international distribution at FRNT Financial, noted, “China’s efforts to prop up the yuan typically translate to broader dollar strength. This could weigh on Bitcoin’s performance, as past episodes of yuan weakness have coincided with Bitcoin underperformance.”
As of this month, the dollar index has risen by 1.8%, while Bitcoin has fallen by 4%, retreating to $40,500 after briefly reaching $49,000 earlier.
