Key Points:
The Chinese yuan slid to nearly eight-month lows against the U.S. dollar (Symbol: USDCNH), as disappointing inflation data pressured the yuan. The USDCNY currency pair was trading at a low range, between 7.2734 to 7.2761. This decline followed data showing that the consumer prices of China grew for a fifth consecutive month in June but missed expectations, while producer price deflation continued, highlighting weak domestic demand despite government support measures.
Picture: USDCNH on an uptrend as the Chinese yuan loses strength, as observed on the VT Markets app.
The weaker-than-expected inflation data in China highlight persistent deflationary risks and weak domestic demand. The People’s Bank of China (PBOC) set the midpoint rate at 7.1342 per dollar, its weakest since November 2023, indicating a controlled depreciation of the yuan.
The strength of the US dollar also contributed to the decline of the Chinese yuan. The dollar rebounded from a three-week low after Federal Reserve Chair Jerome Powell indicated that interest rate cuts might not occur as soon as markets hoped. Such a cautious tone on rate cuts, combined with continued high interest rates, has kept the US dollar strong against other currencies.
Related topic: Interest rate tug-of-war for central banks
Projections indicate that that the Chinese yuan would maintain a bearish trend until September, potentially hovering around 7.3 this year. A return to 7.2 with US interest rate cuts next year, provided the global economic landscape supports such moves.
Going forward, market participants should closely monitor the interplay between the economic policies of China and the interest rate decisions from the Federal Reserve. The upcoming testimony of Fed Chair Powell and subsequent economic data releases will be crucial in shaping the market’s expectations and potential movements in the USDCNH pair.
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