USD/CNY at 5-month low as China inflation makes a modest improvement

USD/CNY at 5-month low as China inflation makes a modest improvement
Written by:
Crispus Nyaga
9th July, 04:57
Updated: 9th July, 04:58
  • The USD/CNY pair dropped to the lowest level in five months as traders reflected on the modest inflation data.
  • The headline CPI rose by 2.5% in June after rising by 2.4% in the previous month.
  • The Producer Price Index (PPI) dropped by 3%, which was better than the previous decline of 3.7%.
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The USD/CNY pair declined by more than 0.25% as traders reflected on the latest inflation data from China. The pair is trading at 6.9861, which is the lowest it has been since March 13.

USD/CNY gains momentum

China inflation rises in June

The Chinese yuan has been rallying this week. The currency has gained by more than 1.1% in the past three days. And on Monday, it had its best day since December last year.

Some analysts attribute the rally to an editorial in a leading Chinese newspaper that predicted a strong bull market. This also led to a sharp rally in stocks, with the Shanghai composite gaining by more than 5%.

A report released by the National Bureau of Statistics (NBS) also supported the rally. The report showed that consumer prices rose by 2.5% (YoY) in June. That was better than the previous increase of 2.4% but slightly below the analysts’ forecast of 2.6%. The CPI declined by 0.1% on a month-on-month basis, which was better than the previous decline of -0.8%.

According to the bureau, food prices rose to 2.5% after rising by 2.4% in the previous month. This increase was probably because of vegetable shortage in parts of the country. Non-food prices rose by 0.3% compared with May’s 0.4% increase. Pork prices rose by 81.6%, down from the previous 81.7%.

Producer prices moderate

Meanwhile, the price producer index moderated in June as the price of global commodities rose. The PPI fell by 3% in June from a year earlier. That was better than the previous increase of 3.7%. This increase was partly because of higher crude oil prices.

The decline of USD/CNY is also partly because of the strength of the Chinese economy. Data released last week showed that the manufacturing and services PMIjumped sharply. The two have been rising for the past few months. The strength is also seen by the prices of industrial metals. According to Bloomberg, the industrial metal index has jumped by 20%, which is a signal of increasing demand.

US dollar weakness

US dollar index falls
US dollar index has been falling

The USD/CNY is also falling as the US dollar falls broadly. The closely-watched US dollar index is down by more than 0.20%. The currency has weakened against all its peers. It has fallen by 0.30%, 0.15%, 0.20%, and 0.16% against the euro, pound, Swiss franc, and Swedish krone.

This weakness could be because of the rising number of coronavirus cases. Health officials confirmed more than 62,000 new cases yesterday, which was the highest number ever recorded. The previous record was set on Friday, when the country confirmed more than 61,000 new cases.  As a result, the total confirmed cases in the US is more than 3 million.

Deaths too are rising. According to the Covid Tracking Project, there were more than 900 deaths on Wednesday, up from 242 on Monday.

USD/CNY technical analysis


The daily chart above shows that the USD/CNY pair is trading below the 50-day and 100-day exponential moving averages. The RSI has moved to the oversold level of 24. Also, the price is below the 50% Fibonacci retracement level. Therefore, I expect it to continue falling as bears attempt to move below the 61.8% retracement level at 6.9718. On the flip side, a move above the 50% retracement at 7.0110 will invalidate this prediction.

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