Chinese Yuan Weakens as Inflationary Metrics Soften, Will USD/CNH Resume Higher?

Chinese Yuan, USD/CNH, China CPI, PPI, PBOC, Fed, Technical Analysis – Market Alert

• Chinese Yuan weakens after softer CPI and PPI data from China
• This is opening the door to more economic stimulus, dovish PBOC
• USD/CNH uptrend in focus with the pair testing key rising support

The Chinese Yuan weakened after China released August’s inflation metrics and they disappointed across the board. The Consumer Price Index (CPI) clocked in at 2.5% y/y versus 2.8% seen and down from 2.7% prior. Meanwhile, the Producer Price Index (PPI) – which is a gauge of wholesale inflation – crossed the wires at 2.3% y/y versus 3.2% seen and down from 4.2% prior.

While there was not a significant milestone for the CPI gauge, the PPI print was the lowest seen since February 2021. Overall, the data continues to speak of signs of a slowing economy, opening the door for more supportive measures from the government. A few weeks back, China announced an extra 1 trillion in stimulus to cope with fading growth and a wobbly housing market.

Recently, the megacity of Chengdu extended lockdowns without offering an end date. The People’s Bank of China (PBOC) has been responding by cutting interest rates to help the nation cope with ongoing Covid breakouts and lockdowns. It continues to go on a separate bath from the vast majority of developed central banks that are trying to cool soaring inflation.

As a result, the growing monetary policy divergence between the Federal Reserve and PBOC is offering a strong bullish fundamental case for USD/CNH. In recent days, the pair touched its highest since July 2020. With the Fed in a blackout period until its next policy announcement later this month, the US Dollar is awaiting local CPI data on Tuesday.

Chinese Yuan Reaction to China CPI and PPI Data

Chart Created Using TradingView

Chinese Yuan Technical Analysis

USD/CNH is trying to close under the near-term rising trendline from August. Immediate support is the 23.6% Fibonacci extension level at 6.9396. Confirming a breakout under the latter could open the door to a near-term turn lower. Such an outcome would eventually place the focus on the 50-day Simple Moving Average (SMA) which could reinstate the dominant uptrend. Further gains has key resistance at the midpoint of the extension at 6.9967 before the 61.8% level at 7.0223 comes into focus.

USD/CNH Daily Chart

Chart Created in Trading View

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter