Calm reaction to US CPI puts even more bearish pressure on USD / CNH

Important issue:

  • US Inflation: US Consumer Price Index Jumps to 13 Years High
  • Inflation in China: The PPI-CPI difference widens as producers hit profits
  • USD / CNH Tendency towards lows for the first time in 3 years

Inflation in the United States

Yesterday’s US inflation data was definitely digestible. The numbers themselves are a bit worrisome, but the market reaction to the data is probably the most shocking part. Headline inflation surged 5% from last year, the largest price increase in 13 years. Investors have been concerned about inflationary pressures for some time, but Fed Chair Jerome Powell has done a good job of alleviating those concerns. He is very convincing, the market has wiped out yesterday’s numbers, the US yields and the dollar have fallen, and the US stock market seems to have hit a record high.

The market reaction is a bit confusing. Yes, we all expect inflation to get hot for months, so it’s not surprising that the readings were higher than expected, but traders are completely convinced that inflation will actually be temporary. Seems to be doing. It’s like putting all the eggs in one basket and hoping that the Fed can prove that it can control inflationary pressures.

Looking at the real interest rate (10-year government bond yield minus headline inflation), it has fallen to minus 3.6%. This is the lowest level since the Fed promised to curb inflation around 1980. Faced with some of the worst inflationary pressures, real yields are so low. This should be a source of concern, whether or not inflation is temporary. And yesterday’s market reaction only proves that bond and equity traders have ventured across their boundaries.

US Real Interest Rate (1960-2021)

Chart created by Daniela in Refinitiv

Inflation in China

In addition to the United States, China’s inflation data was reported on Wednesday, further widening the PPI-CPI gap. The Producer Price Index jumped from 6.8% last month to 9%, the highest level since 2008. However, the CPI has not followed suit, with consumer price inflation rising only 0.9% to 1.3% compared to PPI, below the projected 1.6%. This indicates that the rise in factory input prices is not pouring production lines towards consumers. This may mean that producers are seeing a decline in profits.

If price shifts to consumers are seen in the coming months, China could become an exporter of inflation to other countries, raising concerns about inflationary pressures such as the Fed, ECB and BOE. Let’s do it. For now, the People’s Bank of China is unlikely to worry too much about inflation, but the yuan is steadily rising against the yuan. U.S. dollar Over the past 12 months, the Chinese government has prompted local banks to hold more foreign currency in their reserves.

However, the US dollar’s reaction to US consumer price index data released yesterday seems to be somewhat limited in its rise, which puts even more bearish pressure on it. U.S. dollar/ CNH.

USD / CNH Daily chart

Calm reaction to US CPI puts even more bearish pressure on USD / CNH

The downward momentum of the USD / CNH has improved in the last few sessions as buyers felt resistance along the 6.40 line. The high bounce at the end of May was exhausted and the seller regained control, bringing the Stochastic Oscillator closer to the oversold area. Short-term resistance remains strong at 6.40 and 6.4128, so bearish bias is expected to continue next week.

Trade patterns since the USD / CNH was as low as it is now in 2018 show that 6.3470 is an area that buyers have been attracted to in the past and could serve as an area of ​​support. If the pair falls below this level, there seem to be many important levels up to 6.2363. 6.2363 is the lowest point in 2018 when the USD / CNG bounced back and is also the lowest point since August 2015.

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— by market analyst Daniela Sabin Hathorn

Follow Daniela on Twitter @HathornSabin

Calm reaction to US CPI puts even more bearish pressure on USD / CNH

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