China Inflation Remains Unchanged at 2.8%, PPI Declines

China Inflation Remains Unchanged at 2.8%, PPI Declines
September 11, 2019

 

After losing ground to the greenback on Monday, the Chinese yuan rebounded yesterday morning following the release of better-than-anticipated inflation rate in August. However, the yuan was unable to consolidate as data released late yesterday indicated a decline in Chinese producer prices caused by weak consumer demand. From a high of 7.1180, the USD/CNY pair declined to a low of 7.0984 before rebounding to 7.1147.

According to the National Bureau of Statistics (NBS), China’s consumer prices rose at a stable pace in August, while producer prices fell further on poor demand marking deflationary pressures. According to the statistical organization, consumer prices increased 2.8% y-o-y in August, unchanged from the pace seen in July. Economists had predicted the rate of inflation to decline to 2.7%.

Food prices rose 10%, led by pork prices. In the meantime, non-food price inflation decreased to 1.1% from 1.3%. Excluding food and energy, core inflation was 1.5%, compared with 1.6% in July. On a m-o-m basis, consumer prices increased 0.7% after rising 0.4% in July. It was the second successive rise in prices.

Commenting on the consumer price inflation, Investment bank China International Capital Corporation Limited said: “The upward pressure for overall CPI this time will likely be visibly less severe than in many of the past food price inflation cycles, as soft aggregate demand growth may dampen non-food CPI and keep the spillover of food price inflation relatively limited.”

While the consumer price data strengthened the yuan, the producer prices data provided the opportunity for the US dollar to bounce back. The report from NBS indicated that producer prices fell for the third successive month in August. Producer prices declined 0.8% annually after falling 0.3% in the earlier month. Prices were anticipated to decline 0.9%.

On an m-o-m basis, producer prices declined 0.1% in August, after falling 0.2% in July.

Julian Evans-Pritchard and Martin Rasmussen, economists at Capital Economics, opined that the cut in reserve requirement ratio (RRR) validates the assessment that uncontrolled food price inflation is not an obstacle to monetary easing.

ANZ economists’ anticipate further monetary easing in the coming months as demand-side pressures remain subdued and factory-gate deflation intensifies.

In a note to clients, ANZ said, “Despite the higher CPI, we expect the People’s Bank of China (PBOC) to cut interest rates in the fourth quarter this year. China’s declining producer price index (PPI) carries more weight with policymakers in their monetary policy decisions, in our view.”

The greenback’s recovery was also aided by weakness seen in Chinese exports. As per the General Administration of customs, China’s exports declined 1% y-o-y in August, following a 3.3% increase in the earlier month. The market had anticipated a 2% rise in exports. Imports plunged 5.6% in August, an increase from 5.3% in the prior month. Analysts had anticipated imports to decline by 6%.

On the whole, trade surplus of China widened to $34.83 billion in August, an increase from $26.30 billion in the similar period last year. The US and China trade representatives have decided to restart negotiations in October.  It will be the first face-to-face meeting since the start of August. Until the US and China arrive at an amicable solution to the trade dispute, the USD/CNY pair is expected to remain range-bound with slight bullish bias favoring the greenback.

Technically, the USD/CNY price chart indicates strong support for the currency pair at 7.1020 levels. The Stochastic RSI indicator is near the oversold region. As a result, we can expect the currency pair to move up further in the short-term.

CNY - technical analysis - 11th Sept 2019

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.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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