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Despite recent economic data from China, the dollar has remained strong as investors await the next batch of economic data for the country. The USD/CNH has remained above the 38.2% Fibonacci retracement and is trading above the 26 day Exponential Moving Average (EMA). But a break below the 38.2% retracement could reverse the alcist trend. It is also possible that October’s CPI may move the yuan, according to analysts.
Last week, Chinese industrial production and retail sales came in below the market estimates. On the positive side, China’s stats bureau said the country’s economy continued to improve in July, albeit at a slower pace. The stats bureau also acknowledged that the foundation for the recovery is not yet solid, but it expects it to strengthen. However, the slowdown in the economy has made some investors wary of further growth.
Today, the Chinese central bank unexpectedly cut the one-year policy loan rate by ten basis points to 2.75 percent. The central bank injected 400 billion yuan (US$6.8 billion) in order to boost the economy, while 600 billion yuan (US$9.8 billion) was maturing through a one-year monetary easing program. The PBoC said it would continue to support the economy with more monetary easing. In addition, the People’s Bank of China conducted two billion dollars of seven-day reverse repos with an interest rate cut by 10 basis points to 2.10 percent.
The dollar has gained against the yuan, and a few commodity currencies have followed. Platinum and copper both resumed technical breakouts after a recent drop. Iron ore prices advanced. But the Australian dollar and New Zealand dollar were down, and the euro was flat. Some traders waited to see whether the US Federal Reserve would continue to pivot away from aggressive rate hikes.
The Australian dollar fell around 0.5% after weaker-than-expected Chinese data. In Europe, drought conditions have continued to stoke negative sentiment, and European consumers are worried about rising gas prices. In the United States, the S&P 500 advanced for the fourth straight week. It has gained 16.5% in less than two months. It has rebounded from its summer rally, but it is still vulnerable to the Fed’s tightening trajectory. While the Dow Jones Industrial Average, S&P 500, and Nasdaq futures all gained, the EUROSTOXX 50 lost 0.2%.
The yuan has weakened in recent trading after bad economic data from China. China’s central bank unexpectedly cut the MLF rate by 10 basis points, following a weak batch of July data. The bank’s board approved a new governor this week, Adrian Orr. He will serve a five-year term starting in March 2023. The PBoC has a mandate to stabilize the economy, but it acknowledges that it needs more stimulus to do so. In the meantime, the Fed is warning about high inflation and an expected recession.
While the Fed is still threatening to raise rates, better-than-expected US consumer sentiment data has encouraged hopes of a slower pace of rate hikes. The upcoming minutes of the Fed’s last meeting are due on Wednesday. It will be interesting to see whether these results will move the dollar or the yuan