Despite China’s recent unexpected interest rate cut, USD/CNH has failed to hold gains and has retraced much of its previous gains. After climbing over a Fibonacci retracement of 23.6%, the USD/CNH has failed to hold above the 38.2% Fibonacci level, which could mean a break of the parity of divisas. The recent decline in food prices has eased the pressure on inflation in China.
Chinese economic data for the month of July came in weaker than expected, with retail sales undershooting estimates and industrial production well below expectations. China’s stats bureau said that the momentum of the economic recovery slowed in July. While the economy has continued to recover, its growth is expected to remain muted through 2023.
As Chinese exports have strengthened, the trade surplus has risen. However, real export growth has weakened in Northeast Asia. The country’s property crisis has continued to weigh on its economy. Unit labor costs have also increased, with labor markets in Hong Kong, Singapore, and South Korea under pressure. In addition, China’s recent coronavirus lockdown has added to the economic slowdown.
Earlier this month, the People’s Bank of China cut key interest rates by -10bps to 2.75%. It has also announced measures to alleviate liquidity problems for property developers. The move is expected to support China’s economic recovery. However, the weak economic data will put pressure on the currency and its investors.
China’s core inflation, excluding energy, has remained low. However, inflation in India and South Korea has surged. Despite the global economic slowdown, some Asian-Pacific central banks are expected to continue tightening monetary policy. Core inflation has been high in India, but is modest in Hong Kong and South Korea. The IPC of October is expected to be 2.4% from a year ago, compared to the consensus of -1.5%. IPP of October is expected to be -0.9% from a year ago.
Core inflation will likely increase in New Zealand, Australia, and South Korea. However, the recovery of domestic demand should support growth outside of China. In addition, net financial flows have slowed recently, with investors moving out of Chinese stocks.
Investors have become nervous about the Chinese economy after the slowing in July data. The government is expected to cut growth targets to “around 5.5%” in 2022, although the Politburo ruled out a significant change to its stance on COVID-19. In addition, China’s public unrest and weak sentiment have further slowed spending and mobility. This has prompted senior officials to call on local governments to support growth.
China’s economic slowdown is weighing on the global economy, with concerns about a global recession emerging. The Fed’s tightening trajectory remains a concern for investors. However, the recent drop in food prices and lower energy costs have eased inflation pressure. Despite the bad data, the USD is expected to continue moving higher. However, broader market risk sentiment may cap any gains. Traders are waiting for the Federal Open Market Committee’s (FOMC) minutes to be released tomorrow, as well as the NFP report on Friday. If the Fed’s inflation numbers soften further, the USD will be expected to strengthen. Similarly, softer US inflation may bolster bets that the Fed will pivot.