Is China’s reflation trend running out of steam?
At a Glance
The desk positions that China's reviving inflationary momentum may be losing traction, as evidenced by the July CPI data revealing a year-on-year drop to 0.5%, the lowest in six months. Per the full note from ING, the declining inflation numbers, notably the consistent month-on-month price declines and core CPI slipping to 0.9%, signal potential persistent weaknesses in consumer demand and pricing power. This leads us to adopt a cautious outlook for the CNY in the near term, with particular attention to the implications for trade and capital flows amidst a tepid rebound in economic activity.
Key Takeaways
Full Analysis
What the desk is arguing
The desk argues that China's reflation narrative is faltering due to mixed inflation signals, with CPI falling to a six-month low of 0.5% year-on-year in July. Despite some volatile categories like transportation fuels showing slight upticks, it remains clear from recent trends that food and rental costs are undermining broader inflationary pressures, a point emphasized by ING's analysis.
This assessment is underscored by the core CPI reading, which fell to 0.9%, reinforcing the argument that underlying price momentum is weak. August data will be pivotal; any further declines or stagnant readings may necessitate a recalibration of positions in the CNY.
Where it sits in our coverage
Our consensus for USD/CNY is set at 1.075, with a range between 1.04 and 1.12.
The desk's position aligns closely with jpmorgan, although it leans toward the stronger end of the range reflecting the cautious nature of the Chinese economy. Divergence noted with bofa forecasting a weaker CNY could emphasize a more pronounced bearish view on Chinese economic recovery.
How other firms see it
Analysts at jpmorgan and others view the current inflation data as a catalyst for potential policy adjustments, while bofa takes a contrary standpoint, suggesting these trends could lead to a more pronounced currency depreciation.
We should watch how these inflationary trends may influence USD/CNY movements, particularly ahead of any possible signals from the PBoC regarding monetary policy adjustments.
What the calendar says
With no upcoming major events on the schedule that could impact policy or sentiment, traders should remain vigilant for any unexpected economic releases or statements from Chinese officials that could further inform the outlook for inflationary trends and their potential impact on the yuan.
Market Implications
Watch for fluctuations in USD/CNY as potential inflation data from August are anticipated to drive volatility. A slip below 1.075 would suggest heightened trader sensitivity to further Chinese economic indicators.
From the original
Older quick take Quick take Published 03:05 China Is China’s reflation trend running out of steam? China’s CPI inflation cooled to a 6-month low in July, marking a third straight month of negative month-on-month prices, while PPI inflation also decelerated from June's peak.
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