USD/CNY taking a breather but bullish pressure remains elevated ahead of PBoC rate call next week

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• The USD/CNY took a dip back in market action on Wednesday.
• Bullish momentum remains firm for the Greenback despite defensive posturing in Chinese rhetoric.
• Emerging markets continue to suffer against advanced economy currencies.

The Chinese Yuan (CNY) continues to struggle, with the USD/CNY pair sticking above the 7.2600 level despite slipping lower on Wednesday, closing down from the day’s opening bids near 7.2925.

Chinese officials have stepped up their verbal defense of the Yuan recently, including a stronger domestic fix for the currency within China’s borders. Across the emerging market (EM) space, currencies continue to backslide against firmer currencies like the US Dollar (USD). Traders are turning on central banks (CBs) in the EM sphere, especially in countries where CBs have been forced to continue easing monetary policy and cutting interest rates.

EM CBs are broadly more dovish than they were previously, and the emerging picture of a potential soft landing for the massive United States (US) economy is putting further pressure on CBs looking to defend beleaguered currencies.

Despite the Chinese defense of the CNY, the People’s Bank of China (PBoC), in lock-step with the Chinese government, continues to actively pursue stimulus measures and the diverging path between verbal support and policy-based easing is throwing a wrench in the CNY’s path forward.

Mixed messages from PBoC and Chinese government

Foreign exchange economists have noted that China’s attempted verbal steeling of the Yuan is meant to create an illusion of stability, but China is fully aware that they need the CNY to continue to weaken in order to drive economic growth in their flagging economy.

A softening of the US economy would be a boon for EM economies as it would help bolster their export revenues, but higher-for-longer interest rates in the developed world threaten those same economies’ currencies as interest rate differentials continue to widen, making the importing of necessary goods into EM economies increasingly expensive.

Upcoming economic data for China includes Friday’s Industrial Production and Retail Sales data, followed by the PBoC’s rate call next Wednesday.

Annualized Industrial Production in China is anticipated to print a step higher on Friday, with market forecasts broadly anticipating a showing of 3.9% for the year, compared to the previous showing of 3.7%. Retail Sales figures are expected to show an improvement for the same period, with market analysts expecting a print of 3% for the annualized period, up from the previous release’s 2.5%.

Next Wednesday will see the PBoC’s rate call for China’s main interest rate, which last printed at 3.45%. China will also be posting their 1- and 5-year Loan Prime Rate, the base rate that commercial banks use when lending to consumers and issuing mortgages.

The previous printing of the 1- and 5-year prime rate was forecast to decline to 4.05% in August, but the PBoC held the mechanism in place, keeping the lending rate pinned to 4.20%. Investors will be watching closely to see if the PBoC’s rate activity falls in-line with Chinese talking points about the domestic economy.

USD/CNY technical levels

The daily candlesticks for the USD/CNY pairing show the Yuan struggling to develop and maintain a foothold against the Greenback, with the pair testing ten-month highs. The USD has marched higher from the year’s low point near 6.70 set in January, and the 50- and 100-day Simple Moving Averages are stacked firmly bullish, at 7.23 and 7.15 respectively. 

The 50-day SMA is especially critical to technical support on the chart, providing a frequent rebound point for bullish momentum swings, and bidders will be looking to reload on long positions if prices returns to the indicator level.

USD/CNY daily chart

USD/CNY technical levels