The Chinese yuan began the week on a stronger note against the greenback, but was unable to hold onto gains as traders were worried about a resurgence in COVID-19 infections in Europe. Specifically, traders avoided riskier assets over concerns of further lockdowns and prohibitions. After trading at about 6.7544 levels for approximately three hours, the yuan lost momentum.
The USD/CNY pair reversed losses and closed at 6.7865. Still, the level at which the yuan closed was the strongest in the past 16 months as the latest economic data (exports, industrial production, and retail sales) indicate a sharp economic recovery in China. Notably, reflecting robust economic recovery, the country’s central bank (People’s Bank of China) retained its benchmark interest rates for the fifth consecutive month.
The PBoC maintained the one-year benchmark rate (loan prime rate or LPR) at 3.85% and the five-year loan prime rate at 4.65%. The decision was in line with economists’ estimates. In general, the central bank has a similar approach towards medium-term lending facility (MLF) and LPR. Last month, PBoC left the MLF unaltered. Therefore, economists were anticipating the central bank to leave the LPR unchanged as well.
It can be remembered that the one-year and five-year loan benchmark rate was slashed by 20 basis points and 10 basis points, respectively, in April.
The decision on LPR is made based on suggestions made by 18 banks on a monthly basis, although the government does influence interest rate decisions.
Julian Evans-Pritchard, an economist at Capital Economics, anticipates the central bank to raise interest rates (LPR) next year as the economy has almost recovered to the pre-pandemic level, which will encourage the PBoC to tighten monetary policy.
The economist further believes the PBoC will shift its focus on managing financial risks as there seems to be no need for further rate cuts at this point in time.
Recent economic data indicates a robust economic recovery in China. The country’s retail trade increased 0.5% y-o-y in August, reflecting the first growth since December 2019 and better than the flat reading anticipated by economics.
Retail consumption has started to rebound following the lifting of COVID-19 related prohibitions. Clothing recorded sales growth of 4.2% in August, following a 2.5% drop in the earlier month. Cosmetics grew 19%, compared with 9.2% in July.
Likewise, jewelry rebounded with a growth of 4.2%, following a decline of 2.5%. Also, automobiles reported a growth of 11.8%, compared with 12.3% in July. However, oil and related products declined 14.5% in August, following a 13.9% in the prior month.
The country’s industrial production increased 5.6% y-o-y in August, reflecting the highest growth since December 2019 and greater than the market’s anticipation of 5.1% as the economy rebounds from the coronavirus jolt.
Manufacturing output grew 6%, unchanged from July. Electricity posted 5.8% in August, following 1.7% increase in July. Mining rebounded 1.6% in August, after declining 2.6% in the earlier month.
Machinery production increased 15.1% in August, following a 15.6% growth in the earlier month. Similarly, general equipment posted a growth of 10.9%, compared with 9.6% increase in July. Overall, industrial output grew 0.4% in the first eight months of the year.
The strong economic data and risk-off sentiment will keep the USD/CNY pair range-bound with a slight bullish bias in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
