Bitcoin's BTC$86,920.43 price often dances to the tune of global money flows, and right now, a strengthening Chinese yuan (CNY) could be setting the stage for a more bullish backdrop for the cryptocurrency, according to one observer.

The yuan traded at 7.043 per U.S. dollar early Wednesday, its strongest level since Oct. 8. It has strengthened about 1% this quarter and 4% from April’s low of 7.3504 per dollar.

Historically, the yuan hasn't had much direct pull on BTC prices. Rumors have swirled for years that a weaker yuan pushes Chinese capital into crypto (and vice versa), but there's zero solid proof.

However, swings in the yuan’s value can still affect bitcoin via macroeconomic channels and foreign-exchange markets, according to newsletter service LondonCryptoClub, whose founder said the ongoing strengthening of CNY could bode well for bitcoin's price.

"When the yuan is strengthening, it provides the cover for China to step up stimulus and easing to address the deflationary spiral they’re battling," the founders of the newsletter service told CoinDesk.

A strengthening currency makes imports cheaper, thereby putting downward pressure on domestic inflation. This, in turn, creates room for policymakers to provide economic stimulus.

Coincidentally, calls for Chinese stimulus have increased alongside a stronger yuan, following a string of dismal retail sales and corporate investment data released early this week.

This stimulus could compensate for the expected increase in borrowing costs in Japan and Australia and the prospects of slower rate cuts by the Fed, thereby supporting risk assets, including cryptocurrencies.

Now, coming to the foreign exchange part. A relentless rally in the yuan may prompt the People's Bank of China to intervene by buying dollars against the yuan.

These dollars don't just sit idle; they're recycled or sold against other currencies to maintain a stable currency mix in the reserve portfolio, which holds trillions in major currencies, including the dollar, euros, yen, and others.

This recycling operation ends up dragging the dollar index lower. And as it's well known, a weaker dollar tends to boost demand for dollar-denominated assets like bitcoin and contribute to looser financial conditions (cheaper cash).

"Smoothing operations to slow the strength means increasing the money supply as they effectively print CNY to buy dollars. Those dollars also get “recycled”, selling against other currencies to maintain stable FX weightings in their portfolio," founders said.

"This feeds broad dollar weakness. Added together, it all feeds into an easier liquidity environment which should be bullish for bitcoin," they added.

The coming weeks will show whether this backdrop can steady bitcoin’s slide and help the market find its footing again.