USD/CNY drops as factory deflation sends a warning on China recovery

The USD/CNY dropped slightly as investors continued to doubt the strength of the Chinese economy after the statistics office released weak PPI and CPI data. The pair is also awaiting the interest rate decision by the Federal Reserve.

China deflation continues

China’s factory deflation worsened in May, according to the latest data by the National Bureau of Statistics (NBS). The data showed that the Producer Price Index (PPI) declined by 3.7% in May after declining by 3.1% in April. The median estimate by analysts polled by Bloomberg was a 3.3% drop. This decline, which was the worst in more than three years, is bad news for profitability and investments.

In the same month, headline consumer prices declined by 0.8%, which was slightly better than the previous decline of -0.9%. The prices rose by 2.4% from a year ago, which was lower than the 3.3% reported in May. Analysts expected the CPI to contract by 0.5% on a MoM basis and to improve by 2.7% on an annualised basis. In a statement to Bloomberg, Zhou Hao, an analyst at Commerzbank said:

“CPI disinflation is very rapid. If this trend continues, CPI will turn into deflation,” possibly by the end of the third quarter.”

All is not well in China

The worsening factory gate deflation and the decline in consumer prices send a picture that all is not well in the second-largest economy in the world. On Sunday, data from the bureau showed that imports declined by 16.7% in May after dropping by another 14.7% in April. In the same month, exports declined by 3.3% after rising by 3.5% in the previous month.

Another recent data showed that industrial profits declined by a record 27.4% in the first four months of the year. Another data by China Logistics showed that manufacturing PMI declined to 50.6 in May from the previous 50.8. Analysts were expecting the PMI to come in at 51.0. Similarly, a data released last month showed that retail sales in the country declined by 7.5% in April.

Another sign of the country’s weakness is the country’s revenue. According to the Ministry of Finance, revenue collected will decline by 5.3% this year after falling by 14.3% in the first quarter.

Still, there are some positive signs that the country is emerging from the crisis. For example, the country’s vehicle sales rose by 11.7% in May, according to China Association of Automobile Manufacturers. Another data showed that the country’s oil demand has recovered after May imports rose by 15% to 11.34 million barrels a day. In a statement, analysts at Morgan Stanley said:

“The strong increase in China’s imports will have supported the tightening of the seaborne oil market, and hence oil prices.”

USD/CNY focus shifts to the Fed and trade

Traders in USD/CNY will now focus on the Federal Reserve interest rate decision and the ongoing cold war between the US and China. Analysts expect that the Fed will leave rates unchanged, commit to quantitative easing, and possibly implement a yield control for the first time.

Meanwhile, a cold war has been brewing between the United States and China. The US has accused China of not disclosing enough information about the coronavirus earlier on. The country has also accused China of not fulfilling its commitment to buy more American goods. Additionally, analysts expect the government and PBoC to implement more stimulus because of the weak data.

USD/CNY technical outlook

The USD/CNY pair is trading at 7.0623, which is lower than 7.1962, the highest point in May. On the daily chart, the price is below the 50-day exponential moving averages while the RSI has been on a downward trend. It is also slightly above the 23.6% Fibonacci retracement. This means that the pair may continue falling as bears attempt to test the 38.20% retracement at about 7.000.