USD/CNY slides as China industrial profits soars for second straight month

The USD/CNY pair declined slightly during the Asian session as traders reacted to the upbeat industrial profit data from China and the rising tensions between the US and China. The pair is trading at 7.000, which is an important psychological level.

China industrial profits surge

The Chinese economy has made a lot of strides in the past few months. This growth was evidenced two weeks ago when the country reported strong second-quarter growth. In the quarter, the economy expanded by more than 5%, becoming the first major economy to return to growth.

More data is now showing the excellent performance of the Chinese economy. According to the bureau of statistics, profits in the country’s industrial firms rose by 11.5% to 666.55 billion yuan ($95.27 billion). That was the fastest profit growth since March last year and was also the second straight month of increased profits.

In the first six months of the year, the industrial profit declined by 12.8% YoY to 2.5 trillion yuan. Some of the best-performing sectors were in the steel, oil and gas extraction, and non-ferrous metals.  

Meanwhile, earnings at state-owned firms declined by 28.5% in the first six months after falling by 39.3% in the first five months. At the same time, liabilities at industrial firms rose by 6.4% while private sector profits fell by 8.4% in the first six months.

Chinese recovery far outweighs that of the United States. For example, while the Chinese economy expanded in the second quarter, analysts expect the American economy to contract by more than 30%. Similarly, while the Chinese unemployment rate stands at 5.7%, that of the US has risen to more than 10%.

China-US tensions rising

The USD/CNY is also reacting to the rising tensions between the United States and China. During the weekend, Chinese military began live-fire drills in the South China Sea, a move that has irked US officials. The drills will run until the coming Sunday and come a few days after the two countries closed each other’s consulates.

The two countries have been in conflict for the past two years. In January this year, the two countries made progress when they signed the first phase of a trade deal. Recently, however, the rising number of coronavirus cases in the US have put Trump into the defensive. He has put pressure on the UK to abandon Huawei. The administration is also considering banning Tik Tok, the popular social media company.

In a speech last week, Mike Pompeo said:

“We must admit a hard truth that should guide us in the years and decades to come: that if we want to have a free 21st century, and not the Chinese century of which Xi Jinping dreams, the old paradigm of blind engagement with China simply won’t get it done. We must not continue it and we must not return to it.”

USD/CNY technical outlook

On the daily chart, the USD/CNY pair is trading below the 50-day and 100-day EMAs. It is also slightly below the Friday’s high of 7.0236 and below the 50-day EMA. Also, the price is in a strong downward trend as evidenced by the purple trendline. Therefore, the pair is likely to continue falling as bears target the moves below the psychologically-important level of 7.00.