High-Flying US Yields, Worsening Chinese Data

Long USD/CNH on Pullbacks

• Data-Doomed China: Trade, credit, deflation, and declining activity data
• Chinese medium-term rate cut possibly a dress rehearsal for benchmark rate cuts next week?
• Rising US yields support the dollar as US economic data hots up
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

A Downward Spiral: Trade, Credit, Deflation and More

Chinese data has revealed no respite since last week. Worsening trade data (declining imports and exports), lower issuance of credit via new loans, and to top it off, deflation risks! Picking up on the last point, Chinese CPI data revealed that a basket of consumer prices in July was cheaper than those that would have been purchased last July. Meaning prices are declining so fast to entice demand that the local economy risks falling into the vicious cycle where consumers delay purchases now as they know it will cost less later down the line.

Today, Chinese authorities cut the 1-year medium-term lending facility (MLF) 15 basis points to 2.5% in what was viewed as another underwhelming support measure. However, the rate cut opens the door to additional cuts to the benchmark rates (1 and/or 5-year) loan prime rates (LPR). Monetary easing in this fashion could see further currency depreciation. Even if rates remain unchanged next week, fundamental data has been relentless after what was a rather promising Q1. China hoped for an economic resurgence after removing targeted lockdown policies at the end of 2022. Other activity-based data (industrial production, retail sales) also disappointed on Tuesday.

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US Economy Goes from Strength to Strength

US Q2 GDP surprised massively to the upside and since then economic data has shown its resilience. In addition, upside beats in PPI data on Friday and US retail sales on Tuesday have resulted in markets factoring the scenario of ‘higher for longer’ as increased economic activity threatens to refuel inflationary pressures.

While markets have not moved the dial on rate hike expectations, the bond market appears to be having its say, as yields on the longer end of the curve have been climbing at an impressive cadence.

The bullish USD/CNH advance borders on overextended territory (RSI oversold levels), hence the outlook to look for long entries on pullbacks. Nevertheless, the fundamental outlook consisting of positive USD drivers and plenty of CNH headwinds suggests that the pair could retest the November 2022 high of 7.3750.

USD/CNH Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX