USD/CNH: Renminbi plot thickens as China exports slump

China’s renminbi came under intense pressure on Thursday after China published extremely weak trade numbers. The USD/CNH exchange rate rose slightly to 7.18, higher than this week’s low of 7.16. In all, the pair has dropped by more than 1.58% from the highest point this year.

China trade is falling

Economic data from China are showing signs of extreme weakness. Earlier this week, data by the country’s statistics agency revealed that the headline inflation rose by 0% in June, the lowest increase in months. There are now risks that China will experience deflation in the coming months.

The closely-watched trade numbers also came short of expectations. According to the statistics agency, the country’s exports slumped by 12.4% in July while imports declined by 6.8%. These numbers were weaker than those reported in the previous month. China’s trade surplus jumped from $65 billion in May to $70 billion in June as imports declined. 

Therefore, there is a likelihood that the Chinese economic recovery will be worse than expected. As I wrote here, Beijing has placed a target of 5% GDP growth this year. At the same time, analysts at companies like Goldman Sachs, HSBC, and JP Morgan have recently downgraded their estimates.

Other indicators are pointing to more Chinese weakness. For example, key commodity prices have moved sideways in the past few months. Brent crude oil is stuck below $80 while copper remains under pressure this year. 

China’s slowdown is having an impact to other countries. Ocean shipping costs from China have slumped, affecting inflation in countries like the United States. Data published on Wednesday revealed that the US inflation dropped to 3% in June.

The impact of China’s slowdown is that Beijing could be forced to implement more stimulus this year. It is unclear what such a stimulus will look like.

USD/CNH technical analysis

The USD/CNH exchange rate has been in a strong bullish trend in the past few months. This rally saw it jump to a high of 7.2898 last week. The pair has now pulled back recently and dropped to 7.17. This decline continued after the encouraging US inflation data.

On the daily chart, the pair is still above the 50-day moving average. The Relative Strength Index (RSI) has fallen from 75 to below 50 while the Stochastic Oscillator has dropped to the oversold level.

Therefore, the USD to CNH exchange rate will likely resume the bullish trend and retest the important resistance level at 7.376.